Context:
Monetary Policy Committee (MPC) Meet and Budget In the wake of the 2025-26 budget announced, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meets in the hope that this time, under its new RBI Governor Sanjay Malhotra, there will be a monetary policy ease to be announced to compliment the fiscal one from the Budget.
Key Highlights:
- Monetary vs. Fiscal Policy
- There is a delicate relationship between fiscal policy and monetary policy. Even so, they must not compromise on their mandates.
- Fiscal Policy focuses more on growth and equity.
- Monetary Policy, operating under the inflation-targeting regime, must focus on price stability with a view to achieving an average 4% inflation rate within 2-6% annual bands.
- The Fiscal Push to Budget
- An attempt to create consumption growth via a ₹1-trillion tax relief. There is a potential for inflation spurt if the growth assumptions turn out to be wrong or there is an abrupt change in the global economic landscape, such as a shift in US policy.
- Economic Growth and Risks
- Even though the Indian economy is going to grow at 6.4% this fiscal year and between 6.3% to 6.8% in the next, experts feel further stimulus is not needed. But inflation risks, which are appearing for the first time, could sway MPC’s decisions in the future.
Inflation and Monetary Policy
- Retail Inflation has eased a bit but is still at 5%, much above the MPC’s target of 4%. This constrains the room for rate cuts.
- External Risks
- Global inflationary pressures, especially with a stronger dollar, could import inflation into India and push up prices.
- Liquidity Measures
- The RBI has already eased liquidity:
- It cut the cash reserve ratio (CRR) by 50 basis points in December to release ₹1.16 trillion.
The latest liquidity measures are worth another ₹1.5 trillion.
- US Federal Reserve Impact
- The US Federal Reserve has maintained its stance on rates and if the RBI lowers its rates, it might make Indian government bonds less appealing than US Treasuries, which might lead to some portfolio outflows.
Implication for MPC
- Warning Advised
- Strong global uncertainty, strong consumer spending pull, and over 5% constant inflation for sure call for the MPC to be careful in what it does next.
- Watching and Waiting for the Game to Unfold
- The MPC needs to see how the budget measures are panning out, but not exacerbated the inflation by presenting more external threats like a high US dollar.
- Cross the River by Feeling the Stones
- The Chinese proverb here means that the MPC should feel the stones, going slowly, and developing conditions as they come along.
