Has RBI unleashed its arsenal too soon for the economy?

This was accompanied by a swift recalibration of the policy stance from ‘accommodative’ to ‘neutral,’ suggesting that India’s central bank sees this as the outer limit of easing for now. In effect, RBI has declared that the liquidity bridge has been built. It is now up to others to cross it.

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These moves, though significant, were largely in line with market (and media) expectations. They reflect a clear direction towards pushing for growth in the enduring trade-off that all central banks must grapple with. The rate cuts, once transmitted effectively through the banking system, should lower the cost of borrowing for both firms and households. 

The CRR cut will critically expand the pool of lendable funds. All this should lighten the fiscal borrowing load by easing pressure on interest rates. But it is in the gap between intent and outcome that the policy challenge now lies. You can lead a horse to water—and deepen the trough—but can’t do much if the horse does not drink it.

While the mechanical logic of monetary transmission remains sound, the broader economic context raises questions about its potency. Private consumption, which accounts for over half of India’s economic output, remains soft. In the fourth quarter of 2024-25, despite headline GDP growth of 7.4%, it grew just 6%. 

Hiring data offers little comfort, with large corporations trimming their workforce amid uncertain demand and adopting automation-tech like AI. Capital expenditure by the private sector remains tepid, held back not by the cost of money, but by the absence of sustained visibility on topline growth.

This raises a more fundamental question: Can liquidity by itself engineer a recovery in a demand-constrained economy?

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Credit demand has slowed, lately. Banks are not capital-starved, but opportunity-starved. They are sitting on idle funds, with limited avenues for prudent deployment. More liquidity in this backdrop may lubricate the financial system, but do little to energize its core. Persistent demand-side uncertainties tend to make credit appetite anaemic, as confidence is patchy, which means that the policy’s outcome may be partial at best and counterproductive at worst.

Indeed, there is a latent risk that financial incentives get distorted by excess liquidity under conditions of weak credit offtake. For example, banks may begin to lower deposit rates not because structural funding costs would have changed, but because they do not wish to accumulate liabilities they cannot lend out.

This may seem benign, even rational, in the short-term. But what does it do to the long-term structure of savings? Does it incentivize households to seek riskier instruments? Does it push savers towards volatile alternatives in search of higher yield?

Further, with limited lending opportunities, banks and institutional investors may be tempted to chase higher yields through market instruments or structured products, irrespective of their underlying fundamentals. Early tremors are already visible—in speculative equity flows, in softening money-market yields and in the creeping disconnect between credit quality and pricing. 

Are we once again laying a foundation for mis-priced risk? Are we sowing the seeds of financial repression, where capital is kept artificially cheap, risk is systematically underpriced and long-term stability is quietly eroded?

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The inflation narrative too offers no firm comfort. While headline inflation appears under control, aided by a favourable base and some softening in commodity prices, core inflation remains sticky. Food inflation, in particular, has a well-known tendency to turn quickly. With a monsoon season still to play out and global supply dynamics in flux, can price stability truly be taken for granted? Are we misreading temporary disinflation as a structural shift? Could this limit RBI’s policy room if price pressures re-emerge?

What is perhaps most concerning is that even this front-loaded monetary push may not be enough to re-ignite private sector momentum. Fixed capital formation needs more than liquidity—it needs the conviction of private capital decision-makers. It needs entrepreneurs to have faith that economic resilience will propel their growth.

Households need more than affordable loans; they need income security. Banks need more than balance-sheet strength; they need demand visibility. Policy coherence must now move beyond rate actions towards a broader alignment of incentives, investments and institutional trust.

It is clear the central bank has moved decisively. But that alone cannot translate into economic dynamism. What remains unclear is whether Indian businesses are prepared to borrow and build, whether households feel confident enough to consume, and whether the private sector will rise to the occasion.

Has RBI fired a starter’s pistol in a race where too few are at the starting blocks? Or is this the nudge that finally pushes the economy into a self-sustaining sprint?

Liquidity is in place. The baton has been passed. Even the most generous flow of credit cannot animate an economy weighed down by hesitation, where conviction is scarcer than capital. The trillion-dollar GDP question remains—will the system run with it or will it circle in place?

The author is a corporate advisor and author of ‘Family and Dhanda’.