What RBI’s monetary policy committee debated on ahead of its 50-bps rate cut

Mumbai: Members of the Reserve Bank of India’s Monetary Policy Committee decided in favour of an unexpected 50-basis point (bps) rate cut at their meeting earlier in June to prop up economic growth, especially with inflation appearing to be under control, minutes of the discussions released by the central bank showed on Friday.

Five of the six-member rate-setting committee — external members Nagesh Kumar, Ram Singh, executive director Rajiv Ranjan, deputy governor Poonam Gupta and RBI Governor Sanjay Malhotra — voted in favour of the 50 bps cut. External member Saugata Bhattacharya voted for a 25 bps cut.

So far this year, the monetary policy committee has reduced the repo rate by 100 bps.

The economy expanded 6.5% in FY25, at the slowest pace in four years, data released at the end of May showed. Meanwhile, retail inflation has been benign, easing to 2.8% in May from 3.16% in April.

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While announcing the monetary policy decision on 6 June, Malhotra acknowledged that gross domestic product growth remains lower than aspirations, but the central bank retained its forecast at 6.5% for FY26. The RBI also lowered its inflation forecast by 30 bps, with retail inflation for FY26 now pegged at 3.7%.

“On the whole, I believe that, given the current macroeconomic conditions and the outlook, monetary policy needs to support growth, while remaining consistent with the objective of price stability,” said Malhotra.

According to Malhotra, the large cut, coupled with certainty on the liquidity front, would “send a clear signal to the economic agents, thereby supporting consumption and investment through lower cost of borrowing.”

However, the governor pointed out that given the 100-bps rate cut since February, “monetary policy will be left with very limited space to support growth.” 

Shift in stance

He said that it would therefore be appropriate to change the stance from accommodative to neutral. A neutral stance would mean that the RBI would lean on incoming data to decide which way the rate should swing.

The change in stance surprised many, especially because the MPC changed it to accommodative from neutral only two months ago.

Newly appointed deputy governor Gupta said that despite being one of the fastest-growing large economies, India’s rate of GDP expansion can be accelerated. Her assessment, she said, was based on “favourable demographics, conducive shift in regulatory policies, significant infrastructure enhancement, and leveraging on the macroeconomic stability achieved during the past decade.”

Gupta said that there is both a need as well as room for monetary policy to provide support to the economy in order for it to attain and even surpass past rates of growth. She said her rationale for voting in favour of the 50-bps cut was that the reduction in policy rate should quicken transmission as compared to a staggered rate cut.

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In the context of inflation, rising crude oil prices are not expected to translate into a runaway price rise, with state-run refiners expected to absorb the cost, Mint reported on 17 June.

However, there is more likely to be an impact on economic growth. Oil is likely to average $70-80 a barrel in FY26, and a sustained rise from current levels risks a reduction in India’s growth forecasts, according to an Icra note reported by Mint on 19 June.

Ranjan said that although the MPC has not changed its growth projection, the panel expects it could be higher, given the trend in recent years. The 6.5% GDP growth in FY25 was preceded by a 9.2% expansion of the economy in FY24.

Quicker transmission

“Domestic investment, though on a recovery mode, continues to suffer as enhanced global uncertainties are restraining investment impulses,” said Rajan. “...as monetary policy works with a lag, under the current circumstances, a 50-bps cut is preferable to two 25-bps cut(s) for faster and greater transmission.”

He said that similar to the frontloaded rate hikes when the RBI tightens monetary policy, frontloading rate cuts could help in quickening transmission.

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Not everyone was in favour of the outsized rate cut. Bhattacharya said that phrases related to uncertainty and volatility occur in the MPC statement six times and the continued elevated uncertainty remains the primary reason to exercise caution in pacing monetary policy easing.

“Recognizing the prevailing uncertainties, I believe that a measured and cautious progress in policy easing is more appropriate at this time. Accordingly, I vote to cut the policy repo rate by 25 basis points to 5.75%,” said Bhattacharya.

The MPC had also cut the cash reserve ratio (CRR) by 100 bps to 3%. CRR refers to a certain percentage of cash that all banks have to keep with the RBI as a deposit.