Rhetoric has given way to reality. Preventing a slowdown in the economy has taken precedence over inflation control. Policy makers are using a base effect-driven fall in inflation to cut interest rates and project a supportive stance to revive economic growth. The narrative that India is insulated and decoupled from the world has suddenly changed. Fears of global growth and disruptions to trade are harsh realities that have come to the fore in policy-making circles. It is in this context that we need to analyse the decision of the Reserve Bank of India (RBI) to cut interest rates by 50 basis points over the past two policy meetings, and try to project a further easing in the coming months of the financial year.
The backdrop
Let’s first take a look at what’s transpired since the last RBI policy meeting of April 9, when the rates were cut by 25 basis points to 6 per cent.
This is the backdrop that is building up with just a month to go for the next policy meeting (the Monetary Policy Committee meets from June 4-6). Of the above, the only supportive development is the monsoon prediction. But then, the hike in milk prices due to the early onset of summer and the heat wave indicates food and vegetable prices may also be under pressure. A sharp fall in food and vegetable inflation was the core of the RBI’s decision to cut rates. And, the RBI hopes the inflation will be moderate during the rest of the year.
Biggest disruptor
The threat of tariffs imposed on the world by President Donald Trump is something to live with in the coming years. This is the biggest disruptor for the economy, businesses and financial markets. The 90-day pause announced by Trump comes to an end in July.
What Next, we don’t know! This is not data. So, the RBI policy committee cannot make any predictions, nor can it take any action. It would be like shooting in the dark. Stemming from the above is the dilemma faced by the USA Federal Reserve. Fed Chair Jerome Powell has not cut rates. Trump has been putting pressure on the Fed to cut rates, calling Powell `Mr Too Late’ and a `Major Loser’. In fact, the USA and a number of other countries pressed the pause button on their last policy (March 2025). So, worldwide rate cuts are on hold and rate differentials among different countries will trigger huge financial/investment shifts, causing sharp volatilities in the markets. The Fed action could well be an important input to our own policymaking. There has been a confident narrative of how India will be least affected by Trump’s tariff tantrums over the last few weeks. Negotiations are ongoing, and a recent statement from Trump and his team suggests that the deal will be done soon. Will it be an advantage to India? We have to wait.
Confident narrative
But the bigger blow to India could come from disruptions caused by the trade war between the USA and China. The Indian markets have celebrated a combination of rate cuts and Trump is pausing the tariffs, with the Nifty rising by nearly 8 per cent in about 3 weeks. FIIs, who were sellers for over 6 months, have resumed buying. The markets are betting on banking and financial services and the beaten-down IT stocks. The current rally is showing signs of fatigue. Market behaviour is a great indicator of the shape of things to come. The rally has paused a bit.
What will RBI do?
But the big question at this stage is” Will the RBI pause in the next policy? The dovish Statements from the April 9 policy appear to be based on only one reading: a fall in inflation over the last few months (the latest reading for March 2025 was released a few days after the policy at 3.34 per cent is the lowest in many months). But little importance is being given to the base effect of inflation. History shows that a period of high inflation is followed by low inflation, partly due to the base effect. The projected moderate inflation trajectory is largely based on the hope that food and vegetable prices will be lower going forward. As witnessed over the last few years, wild swings in weather patterns can cause unseasonal shortages and push up prices. What the RBI is clear and determined to do is push growth. Hence, the two rate cuts and the change in stance from neutral to accommodative. Besides, the RBI has also been infusing adequate liquidity into the system. The policy statements are consistent with this action.
Crucial days ahead
It is clear that the coming weeks and months are crucial for India’s growth and inflation outlook. We are amid uncertainties that are not easy to overcome. Policy challenges will keep emerging, and the RBI has set itself on a tough road. The last policy was dovish with all members unanimously voting for a rate cut and a change in stance to accommodative. Will the RBI hit a roadblock? Has it opened the champagne bottle too soon? Can the RBI continue to pursue a dovish policy and cut rates by another 25 basis points? Or, will it be forced to pause with a wait-and-watch mode? This is difficult to answer. However, one member of the MPC has clarity on this question. Saugata Bhattacharya, MPC member, had this to say in the minutes of the meeting: “ I did have prior reservations on changing the policy stance to accommodative. I have associated a neutral stance with the flexibility for policy to respond appropriately to the changing balance of risks. The elevated uncertainty at present regarding the evolving economic outlook, which is likely to continue into the near future, warrants that policy decisions be taken considering incoming data on a “meeting-by-meeting” basis. However, it was clarified that the change in stance signals only that “a rate hike is off the table”; an accommodative stance remains consistent with a pause, should macro-financial conditions necessitate. Hence, I concur with the change of stance to accommodative while noting that, in my view, this does not provide guidance of a pre-determined policy easing path.’’ To conclude, another rate cut in the June policy is not guaranteed!
About the Author: Muralidhar Swaminathan is a veteran financial journalist. He has four decades of experience and specialises in financial markets. He tracks markets and mutual funds closely, besides keeping track of global and domestic macro issues. He has launched several financial publications and business TV news channels. In his latest stint, he relaunched NDTV Profit. As Managing Editor at NDTV Profit he built a very strong team in a record time and put the machinery on auto mode.