RBI monetary policy: Swashbuckling start, watchful stance

There’s something timeless about cricket played in whites — a calm, strategic contrast to the slam-bang of the T20 format. Hence, it was heartening to watch Team India, on Day 1 of the five-match Test series in England, make a powerful statement under newly appointed captain Shubman Gill, with emerging star Yashasvi Jaiswal joining him in notching up elegant centuries. As they took control at the crease overseas, back home another fresh leader is quietly shaping the course of a different kind of contest — not on the cricket field, but at Mint Street.

Sanjay Malhotra, the newly appointed Governor of the Reserve Bank of India, too walked out to the pitch at a delicate moment for the Indian economy. And much like a composed middle-order batter debuting as captain, Malhotra has opened his innings with with flair and precision. Since taking command, he has played some swashbuckling policy strokes — most notably a cumulative 100 basis point cut in interest rates since February.

Yet, he’s been careful to downplay any sense of flamboyance. “We should not see it as 20-20 match. We will take the decision after considering all the aspects of what is appropriate for our economy,” he reminded the press — signalling that this is a long-game strategy played in whites, with patience and resolve. MPC convening six times a year — akin to five-day Tests— each session is built on endurance, timing, and adaptability. These, after all, are the very virtues that define not just Test cricket, but sound central banking as well.

At a time when global risks remain elevated, and domestic transmission of rate cuts is still imperfect, the decision to front-load a 50 basis point rate cut shows decisiveness. But the more consequential move is the change in policy stance — from accommodative to neutral. This shift, while subtle, is a masterstroke in managing expectations.

Central banks are not just interest-rate setters — they are also, and perhaps more crucially, expectation managers. Had the RBI delivered both a large rate cut and retained an accommodative stance, it might have cornered itself into a market narrative of continued aggressive easing. Such forward signalling would not only limit future flexibility but also risk distorting bond markets and credit pricing.

While certain quarters have been critical of the RBI stance, the June 4 MPC statement is candid in acknowledging why the committee chose to do what it did: “There is a risk that a combination of 50 bps cut with an accommodative stance could mislead financial markets about the scale and scope of further monetary policy easing.”

The move to a neutral stance is also critical because it preserves credibility — though some commentators argue it sends a “mixed signal”. Markets should not interpret monetary easing as a perpetual direction. By explicitly stating that the stance is “not cast in stone,” the RBI underlines its data dependence — signalling that it will act not ideologically, but intelligently. And the RBI wasn’t wrong in its judgment: within days of the generous cut, inflation cooled to a six-year low of 2.82% in May, only to be followed by a sudden flare-up in crude oil prices amid the Iran–Israel conflict.

While for now inflation has cooled off, the trajectory can change overnight if crude continues to spike and monsoon plays truant. Malhotra has pointed out that the inflation outlook has materially improved, with headline CPI dropping from 6.2% in October 2024 to 3.2% in April 2025 — a sharp 3‑percentage‑point reduction. The full‑year inflation projection has also been revised downward to 3.7% for FY26, from 4.6% earlier. This gives the central bank enough headroom to support growth, which, while steady at 6.5%, remains below aspiration.

Yet, Malhotra has been clear‑eyed about the limitations ahead. Global uncertainties — from commodity prices to currency volatility — persist. In this context, the shift to a neutral stance isn’t just tactical — it’s necessary. It ensures that the RBI retains the flexibility to cut, pause, or hike in response to evolving data.

The global economic outlook, described by many as “fluid and fragile,” has only reinforced the case for proactive policy moves. The IMF recently downgraded global growth projections for 2025 from 3.3% to 2.8%. Against this backdrop, it’s not surprising that the MPC opted for a heavier-than-expected policy rate cut. Combined with potential fiscal support, the move sends a clear message: India is serious about sustaining growth momentum and stands ready to deploy every tool available.

With a “century” under his belt, Malhotra has proven that Team RBI can read the pitch, adjust the tempo, and build the innings as conditions demand — and that, ultimately, is the true test of a team’s mettle in the longest format.