Rate Cuts Will Depend on Outlook, Not Current Inflation: RBI Governor at FE Summit

At the Financial Express Modern BFSI Summit held in Mumbai on July 25, 2025, Reserve Bank of India (RBI) Governor Sanjay Malhotra emphasized a forward-looking approach to monetary policy, stating that future rate cuts will hinge on the outlook for inflation and economic growth rather than short-term Consumer Price Index (CPI) data. This cautious stance comes ahead of the RBI’s Monetary Policy Committee (MPC) meeting scheduled for August 6, 2025, and reflects the central bank’s commitment to balancing price stability with economic growth in an uncertain global environment.

A Data-Driven Approach to Rate Cuts

Governor Malhotra highlighted that while recent data shows retail inflation cooling to a six-year low of 2.1% in June 2025, the RBI’s decisions will not be swayed by temporary fluctuations. “Rate cuts will depend on the outlook for both growth and inflation rather than the current numbers,” Malhotra said, noting that monetary policy operates with a lag, requiring the MPC to consider projections up to 12 months ahead. Current forecasts suggest inflation may rise to 4.4% in Q4, though a downward revision is likely due to recent trends.

The RBI has already implemented a cumulative 100 basis points (bps) reduction in the repo rate this year, bringing it to 5.5% following cuts in February (25 bps), April (25 bps), and a surprise 50 bps cut in June. Malhotra confirmed that the transmission of these cuts, particularly those from February and April, is complete, with lending rates for new loans dropping by at least 50 bps by June. This has contributed to a revival in credit growth, projected at 12.1% for FY25, though FY26 is currently trailing at 9%.

Inflation Under Control, But the War Continues

Malhotra described the RBI’s success in taming inflation as a “battle won,” but cautioned that “the war isn’t over.” Inflation has moderated significantly, dropping from 7.8% in April 2022 to 3.1% recently, largely due to the RBI’s flexible inflation targeting (FIT) framework, which aims for a 4% CPI with a ±2% tolerance band. The framework, credited with anchoring inflation expectations, is set for a scheduled review, with a discussion paper to be released for stakeholder input.

Despite the current low inflation, Malhotra stressed that the RBI remains vigilant, as food price volatility and global uncertainties, such as U.S. tariffs and geopolitical tensions, could impact projections. The central bank’s neutral stance, adopted in June, provides flexibility to respond to evolving conditions without committing to immediate further easing.

Supporting Growth Without Fueling Asset Bubbles

The RBI’s recent policies, including a cut in the cash reserve ratio (CRR) to 3%, are designed to reduce borrowing costs and enhance liquidity. This move, which released ₹2.5 lakh crore into the financial system, aims to lower the cost of intermediation and stimulate credit growth without triggering asset bubbles. Malhotra reassured stakeholders that the RBI has additional tools beyond rate cuts to support economic growth, ensuring macroeconomic stability.

The governor also addressed concerns about growth, noting that India’s 6.5% GDP growth in FY26, while robust, falls short of the RBI’s aspirational 7–8% target. The rate cuts and CRR reduction are intended to boost consumption and investment, particularly in sectors like housing, where lower borrowing costs could spur demand.

Regulatory Reforms and Financial Inclusion

Beyond monetary policy, Malhotra outlined the RBI’s efforts to simplify its regulatory framework. With over 8,000 regulations currently in place—only 3,000 of which are actively used—the RBI plans to consolidate them into 33 master frameworks. A regulatory review cell will reassess policies every 5–7 years to ensure they remain relevant. This initiative aims to enhance efficiency and financial stability while reducing compliance burdens.

The RBI is also advancing financial inclusion, with officials visiting 2.7 lakh panchayats for re-KYC and outreach programs. Malhotra raised concerns about industrial houses owning banks, citing potential conflicts of interest, and clarified that while voting rights are capped at 26% under the Banking Regulation Act, foreign banks can hold up to 100% shareholding in domestic banks.

Digital Payments and Future Challenges

Malhotra noted that digital payments are currently subsidized by the government, but future costs may need to be shared by users or the state to sustain the infrastructure. He also flagged concerns about rising fraud in digital payments, announcing plans for secure website domain names to curb fraudulent practices. Additionally, the RBI is monitoring cryptocurrencies, which Malhotra warned could complicate monetary policy and financial stability.

Looking Ahead to August 6

As the RBI prepares for its August 6 policy meeting, expectations are mixed. A Reuters poll suggests 75% of economists anticipate the repo rate will remain at 5.5%, though some predict a 25 bps cut, depending on incoming data. Malhotra’s data-driven approach underscores the RBI’s commitment to balancing growth and inflation while navigating global headwinds, such as U.S. tariffs and potential trade disruptions.

The governor’s remarks at the FE Summit signal a cautious yet proactive stance, with the RBI poised to support India’s economic resilience while keeping inflation in check. As stakeholders await the MPC’s next moves, Malhotra’s emphasis on long-term outlooks over short-term data reinforces the central bank’s strategic focus on sustainable growth.

Sources: The Indian Express, The Hindu, Business Standard, Financial Express, Times of India