​Same page: on monetary policy, the RBI, the Government  

The Reserve Bank of India (RBI) Monetary Policy Committee’s decisions, on Friday, show that the central bank is now unequivocally choosing growth in the perennial growth-inflation trade-off. This is the correct approach at this time. The first major decision was to cut the repo rate by 50 basis points to 5.5%. It comes on the back of two cuts of 25 basis points each, in February and April. With the latest retail inflation coming in at a 69-month low, and generally exhibiting a subdued trend, price stability has now been relegated as a secondary concern. These rate cuts will, once the banks transmit them to borrowers, make it cheaper for companies and consumers to borrow to invest and purchase. The second major decision, of slashing the cash reserve ratio by 100 basis points, will help with the transmission of the rate cuts. The less that banks have to keep with themselves, as stipulated by the cash reserve ratio, the more they can lend out — and now at lower rates. It is worth noting, however, that the central bank has again changed its stance. In April, it had moved from being neutral to being accommodative, indicating that it was inclined to cut rates further. It has now moved back to neutral, meaning more rate cuts in the short term are unlikely, unless growth falls well short of expectations. This is a sensible stance to take, given the vast uncertainties that the Indian and global economies are facing. The neutral stance also means that the RBI is equally predisposed to raise rates again in the event of an unforeseen and sustained spike in prices. The monsoon is yet to fully play out, after all.

The timing of these decisions is sound. Inflation is low and not likely to jump any time soon if current factors remain unchanged. Further, there are no major elections now that would otherwise have necessitated a pre-emptive strong grip on price levels. On the other hand, growth is lower than it could be. The RBI has projected growth in the current financial year 2025-26 to be 6.5%, which is no faster than what the government provisionally estimated for the previous year. Fiscal policy in terms of government spending has reached the limit of the stimulus it can provide. After a decade of increasing outlays, government capital expenditure can at best be maintained at the level it is at, but cannot reasonably be expected to grow much further. Finance Minister Nirmala Sitharaman and officials in the Ministry of Finance have indicated as much. Apart from developmental and social priorities, the government now has additional defence spending to account for. Monetary policy has to step up and boost growth, and it is good to see the RBI and the government on the same page.