Synopsis
Sanjay Malhotra's hypothetical RBI briefing on October 1st indicates the Monetary Policy Committee unanimously kept the policy repo rate unchanged at 5.5%, maintaining a neutral stance. This decision balances robust Q1 GDP growth and moderated inflation against geopolitical uncertainties and evolving tariff impacts. RBI projects 6.9% GDP growth for 2025-26 and 3% CPI inflation.
On October 1, Sanjay Malhotra will brief a nation eager to know whether RBI will follow the GST rationalisation with a class act of its own, or whether it will remain cautious.
RBI's dilemma is this: how can it best deliver on its mandate: 'Price stability, keeping in mind the objective of growth.' YV Reddy put it best: 'While democracy is designed to construct a system where the country can ideologically head in a different direction with every election cycle, the country cannot keep changing its economic course every five years. Economic planning is long term.'
The onus is, thus, on RBI to ensure the economy's long-term health. And since Malhotra is unlikely to claim, 'I'm really good at predicting things and I'm not saying this in a braggadocious way,' here's an edited version of what one hopes to hear on Wednesday, based on his past statements.
'Namaskar and greetings to all on the eve of Dussehra, Gandhi Jayanti and Deepawali. May this pious and auspicious month bring good luck to all of us and to our economy.
The monsoon has been progressing well. We are halfway through the festival season, which brings buoyancy in economic activity. This favourable domestic setting, together with supportive policies of the government and Reserve Bank, augurs well for the economy in the near term. Unfortunately, geopolitical uncertainties have not abated, and global trade challenges linger.
Much has changed since MPC's August meeting: first, higher (50%) tariffs on exports to the US have come into effect; second, GST has been rationalised; and third, the H-1B visa fee (for first-time applicants) has been sharply hiked.
The first was anticipated, the second was still in the works during the last meeting, the third came as a bolt from the blue, and now we have 100% tariff on exports of branded and patented pharma products.
Leveraging significant moderation in inflation, we have, however, taken decisive and forward-looking measures to support growth by front-loading our rate actions.
Decisions of Monetary Policy Committee (MPC)
MPC met on the 29th and 30th of September and 1st of October to deliberate and decide on the policy repo rate. After a detailed assessment, MPC voted unanimously to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.5%. MPC also decided to continue with the neutral stance.
MPC noted that while headline inflation is much lower than projected earlier, despite the recent uptick, it is due to volatile food prices. Growth is robust, as seen by Q1 GDP growth coming in way above expectations at 7.8%. Uncertainties of tariffs and implications of the hike in H-1B visa fees are evolving. Monetary policy transmission is continuing. The impact of a 100 bps cut since February and CRR cut is still unfolding.
On balance, therefore, the macroeconomic conditions, outlook and uncertainties call for the continuation of the policy repo rate of 5.5%.
Accordingly, MPC unanimously voted to keep the repo rate unchanged. It further resolved to maintain a close vigil on incoming data and evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path. Accordingly, all members decided to continue with the neutral stance.
Rationale of MPC's decision
RBI is at the crossroads. Even though our priority is, and must always be, price stability, we cannot be indifferent to growth concerns. Fortunately, the economy continues to be resilient, as seen by better-than-expected Q1 growth.
The government's efforts to shore up growth-first, through sustained capital expansion, and second, through a much-needed GST rationalisation-together with the earlier I-T reduction and festival-driven consumption, are bound to result in greater capacity utilisation, help private sector players rediscover their lost animal spirits, and start investing.
But we need to be mindful of the possible impact of geopolitical uncertainties. Taking all these factors into account, real GDP growth for 2025-26 is projected at 6.9%, with Q1 at 7.8%, Q2 at 7%, Q3 at 6.6%, and Q4 at 6.3%. Real GDP growth for Q1:2026-27 is projected at 6.6%. The risks are evenly balanced.
Retail inflation rose to 2.07% in August but is well within the target range. CPI inflation is likely to edge up above 4% in Q4:2025-26 and beyond, as unfavourable base effects and demand-side factors from policy actions come into play, though GST cuts are expected to offset these to some extent.
Considering all these factors, CPI inflation for 2025-26 is projected at 3% (earlier 3.1%), with Q2 at 2.1%; Q3 at 3% (earlier 3.1%) and Q4 at 4% (earlier 4.4%). CPI inflation for Q1:2026-27 is projected at 4.9%. The risks are evenly balanced.
But even as we wait for clarity, especially on the external front, let me assure you that going ahead, RBI will continue to be nimble and flexible in its liquidity management. We will endeavour to maintain sufficient liquidity so that the productive requirements of the economy are met, and transmission to money markets and credit markets remains smooth.
Namaskar and Jai Hind.'
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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