RBI Has To Remain Nimble Amid Global Uncertainty

In a rare happening, all members cited the potential downside risks to growth from Trump’s tariffs in the recently concluded meeting of the monetary policy committee, along with an increasingly encouraging inflation outlook as underpinning the rate-cut call. The need to provide clarity on near-term policy guidance amid global uncertainty drove the decision to change stance as well. Going ahead, while a 25bps cut in June is a given, the evolving tariff situation is likely to drive the policy path with another 25-50bps of possible easing thereon.

The meeting minutes, which were released recently by the Reserve Bank of India (RBI), reflect a remarkable convergence in members’ views and outlook, as evident in the unanimous decision to cut the repo rate by 25bps while also changing the stance to ‘accommodative’ from ‘neutral’. Most members mentioned that India’s growth being largely domestic-demand-driven provides a buffer against significant global shocks. For instance, Governor Sanjay Malhotra believes that the strong domestic demand would cushion against global headwinds.

However, while Dr Ranjan also pointed to India’s relatively better position due to it being primarily domestic driven, all members cited that downside risks to growth have risen due to possible spillovers via external channels. Notably, Bhattacharya was a little more concerned about these spillovers if tariffs were not significantly diluted. With unanimity around higher downside risks to growth, most members also mentioned the need to provide clarity on near-term policy guidance via a change of stance to ‘accommodative’. They were unanimous in stating that the inflation outlook is now far better than a few months ago, with several members, including Governor Malhotra, mentioning the expectation of a normal monsoon and healthy rabi crop harvests, along with steady and moderate core inflation and falling global crude and commodity prices. This was cited as the key driver for the encouraging inflation outlook. Malhotra opined that the favourable factors for inflation outweigh possible adverse impacts, and will thus drive disinflation for most of FY26.

This rate cut and stance change were on expected lines, though global uncertainty has remained elevated, with the ‘Liberation Day’ tariffs having since been paused for 90 days, after this MPC meeting. While the endgame is anyone’s guess, it is likely that the monetary policy may have to do the heavy lifting in India by being more a countercyclical than a fiscal policy this year. Though a further 25bps cut in June is a given, the resolution of tariff uncertainty would dictate the policy path.

Emkay does not rule out another 25-50bps of easing thereon which could take the terminal rate to 5.25 per cent in this cycle – no doubt contingent on the extent of the global slowdown/recession. Fluid global dynamics will require the RBI to be nimble in managing any risk of tighter financial conditions. The RBI has non-conventional easing options like easier regulatory norms, lower daily CRR maintenance requirement for banks to sub 90 per cent and sterilised rupee management to use as well if needed.