Future Rate Cuts Depend on Inflation Outlook, Not Current Data, Says RBI Governor
Reserve Bank of India Governor Sanjay Malhotra clarified that future interest rate cuts will be determined by the outlook for inflation and growth, not just the current low inflation numbers. Speaking in Mumbai, he noted that monetary policy operates with a lag and must consider projections up to 12 months ahead. While June's retail inflation was low at 2.1%, the RBI's forecast anticipates a rise to 4.4% by Q4, tempering expectations for immediate further easing in monetary policy.
Unpacked:
The RBI anticipates inflation to rise due to potential weather-related uncertainties, evolving tariff-related concerns, and global commodity price impacts, despite recent declines driven by lower food prices and favorable crop output. These risks could push inflation higher later in the year, hence the 4.4% Q4 forecast.
The RBI’s medium-term inflation target is 4%, with a tolerance band of +/-2%. This target guides monetary policy decisions, aiming to maintain price stability while supporting economic growth. Keeping inflation within this range helps preserve purchasing power and encourages investment.
The RBI projects real GDP growth at 6.5% for 2025-26, with quarterly growth between 6.3% and 6.7%. A strong growth outlook allows the RBI to be cautious with rate cuts, balancing the need to support expansion while preventing inflation from rising above target levels.
Recent low inflation is mainly due to a significant drop in food prices, record wheat and pulse production, and steady core inflation. Favorable weather conditions and a reversal of deflation in fuel prices have also played a role.