More than a rate cut: RBI’s decision reinforces its dual mandate

The decision, unanimously endorsed by the Monetary Policy Committee (MPC)—for the second time in a row this year—comes amid a complex global economic environment marked by rising trade tensions and persistent geopolitical volatility. It also reflects a broader global trend, where countries have gradually shifted away from monetary tightening towards rate cuts, albeit cautiously.

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Interestingly, during the six MPC meetings held in the calendar year 2024, the panel had chosen to keep the repo rate unchanged at 6.5%. These decisions, however, were not without internal debate, particularly regarding whether rate cuts were warranted to support growth. The voting pattern across those meetings revealed a split: a 5:1 majority in favour of maintaining the status quo in February, April, and October 2024, and a narrower 4:2 majority in June, August, and December 2024.

This shift from a lack of unanimity in previous meetings to a unanimous verdict on the rate cut marks a significant moment in India’s journey with flexible inflation targeting, reflecting a maturing consensus within the MPC that monetary policy must now pivot decisively to support growth without compromising price stability.

The recent policy rate cuts need to be recognized as a crucial step in the path that India must pursue to ensure economic resilience amid an increasingly bleak global economic outlook. Trade tariffs imposed by the US have triggered a fresh wave of global volatility, resulting in widespread equity sell-offs, a weakened dollar index and a notable easing of crude oil prices. These developments have heightened concerns of slower global growth and rising inflationary pressures in various economies. As RBI navigates these turbulent global conditions, the latest rate cut signals its strategic focus on supporting domestic growth while remaining alert to inflation risks.

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With real GDP growth estimated at 6.5% for 2024-25—following a strong 9.2% expansion the previous fiscal year—India appears to be on a relatively stable course. The Monetary Policy Report released on 9 April projects broad-based growth, supported by rural demand, a potential recovery in urban consumption and improved fixed capital formation, largely driven by increased government capital expenditure. However, this growth outlook remains contingent on a sustained recovery in industrial activity, continued resilience in the services sector and a normal monsoon that does not disrupt the broader growth momentum.

A key aspect of RBI’s policy rationale is the marked improvement in the inflation outlook. Driven by steep seasonal correction in vegetable prices bringing food inflation down to a 21-month low of 3.8%, Headline Consumer Price Index (CPI) inflation has dropped sharply—falling from 5.2% in December 2024 to just 3.6% in February 2025. Fuel prices softened, and while core inflation inched up slightly to 4.1%—driven largely by surging gold prices—the overall inflation environment remains benign.

With the second advance estimates suggesting record wheat output and higher pulse production, contributing to price stability, the inflation outlook looks positive, and RBI has projected CPI inflation for 2025-26 at an average of 4.0%, comfortably within the central bank’s target range. 

More importantly, inflation expectations among households have also softened, pointing to a durable shift in sentiment. In the March 2025 round of the Reserve Bank’s Households’ Inflation Expectations Survey, the three-months and one-year-ahead inflation expectations of urban households’ decreased by 40 basis points and 50 basis points, reaching 8.9% and 9.7%, respectively, as compared to the January 2025 round. 

The proportion of respondents expecting the general price level to increase by more than the current rate declined for both horizons vis-à-vis the previous round.

Also Read: RBI Policy: Domestic growth takes priority amid global uncertainties

Against this backdrop, RBI’s decision to ease interest rates is as much a vote of confidence in the domestic economy as it is a necessary step to bolster momentum amid global headwinds.

While external trade prospects remain cloudy—particularly for merchandise exports—domestic growth engines are revving up. Corporate and bank balance sheets are healthier than they’ve been in years, and capacity utilization is on the rise.

By lowering borrowing costs, the central bank aims to support credit expansion, enhance investment appetite, and stimulate consumer demand—particularly in the urban segments where consumption is showing early signs of revival. The accommodative stance also signals RBI’s readiness to respond proactively if global shocks intensify.

The monetary policy decision comprising both the rate cut and the change in stance signals RBI’s commitment to nurturing growth without undermining its inflation-fighting credibility. Coming as a unanimous decision of the MPC members, it reflects a careful calibration of domestic strengths and external vulnerabilities.

By leveraging a favourable inflation window, the central bank has chosen to empower growth while staying prepared for the unexpected. It is a move that aligns with its dual mandate and reinforces confidence in India’s economic resilience at a time when such assurance is needed the most.

These are the author’s personal views.

The author is professor, and finance and economics and executive director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR.