Timely inaction: On
RBI’s decision to
hold repo rate
The decision of the RBI’s Monetary Policy Committee (MPC) to keep the repo rate unchanged and adopt a “wait and watch” approach, as stated by the Governor, appears to be a prudent and reasonable step. In a global environment where sudden actions and statements have disturbed markets, economies, and households, a balanced and cautious policy response was necessary. The primary difficulty before the MPC is that its main instrument, the repo rate, affects inflation and economic growth in opposite directions. If the MPC had increased interest rates to control a possible rise in inflation, it would have negatively impacted economic growth. Conversely, if it had reduced rates to support growth, it could have led to higher inflation. The ongoing conflict in West Asia has created both problems simultaneously: disruptions in supply chains have increased costs while also slowing down growth. Therefore, any change in the repo rate at this stage could have worsened the situation and further weakened economic sentiment.
In his address, RBI Governor Sanjay Malhotra projected India’s GDP growth at 6.9% for the financial year 2026–27. However, since this projection is made at the beginning of the financial year, it is likely to undergo significant revisions in future MPC meetings. For instance, in April last year, the MPC had estimated growth for 2025–26 at 6.5%, whereas the government’s latest estimate stands at 7.6%. Uncertainty continues in West Asia, and shipping companies remain cautious about passing through the Strait of Hormuz. These developments, along with fuel-related constraints, are expected to affect growth during 2026–27. The RBI has reduced its growth forecast for the first quarter only marginally by 0.1 percentage points, which may turn out to be somewhat optimistic. Additionally, the World Bank’s India Development Update report suggests that industrial growth in India may slow down during the current financial year.
Both consumer spending and government expenditure are also expected to decline as efforts are made to control expenses. On the other hand, inflation is projected to rise significantly to 4.6%, according to the RBI. Despite this, the MPC’s decision not to increase interest rates is justified because most of the inflationary pressure is arising from supply-side issues rather than demand-driven factors. Increasing rates would not only have further slowed economic growth but also would not have effectively controlled inflation. Several uncertainties still need to be resolved before monetary policy can take decisive action, including the ongoing conflict, U.S. tariff-related developments, and the possible impact of El Niño on the monsoon. Until greater clarity emerges on these issues, maintaining the current policy stance remains the most appropriate course of action.
