MPC and Budget 2025-26: Will RBI Cut Rates Under Malhotra?
Why in the news
After Budget 2025-26, the MPC prepared to meet under Governor Sanjay Malhotra, with hopes that a rate move would complement fiscal stimulus.
Key facts
- Monetary policy under inflation targeting must ensure price stability: 4% average within a 2-6% band.
- Budget gave ₹1 trillion tax relief to spur consumption; this may stoke prices if growth assumptions fail.
- Growth: 6.4% this fiscal, 6.3-6.8% next; experts saw no need for more stimulus.
- Retail inflation eased but near 5%, limiting room for cuts.
Liquidity and external factors
| Factor | Detail |
|---|---|
| CRR cut | 50 bps in December, freeing ₹1.16 trillion |
| Newer liquidity steps | Another ₹1.5 trillion |
| Strong dollar | Could import inflation |
| US Federal Reserve | Holding rates; an RBI cut may make Indian bonds less attractive than US Treasuries, causing outflows |
Way forward
- Given global uncertainty and inflation above 5%, the MPC should be cautious and watch Budget effects.
- A Chinese proverb is cited: cross the river by feeling the stones.
Exam angle
- Governor: Sanjay Malhotra; target: 4% (+/-2).
- December liquidity tool: CRR cut of 50 bps.