Slowing growth and rising inflation necessitated unchanged rates

Slowing growth and rising inflation necessitated unchanged rates

The RBI Monetary Policy Committee’s (MPC) decision to keep interest rates unchanged — a “wait and watch” approach, in the Governor’s words — is a sensible move. At a time when hasty words and deeds have roiled world markets, economies, and even households, a measured policy response was the need of the hour. The challenge before the MPC is that the main tool it has — the repo rate — impacts growth and inflation in opposite ways. That is, if it had raised rates to try to contain an anticipated surge in inflation, this would have hurt growth. On the other hand, if it lowered rates to boost growth, this would have pushed inflation up. The war in West Asia has resulted in both of these undesirable outcomes: supply chain constraints have pushed up costs while also dragging down growth. A rate change at this juncture could have made matters significantly worse and further dampened the mood in the economy. In his speech, RBI Governor Sanjay Malhotra predicted that India’s GDP would grow 6.9% in 2026-27. Given that this is still the first month of the financial year, the forecast is likely to change considerably over the subsequent MPC announcements. For example, the MPC in April last year had predicted that growth in 2025-26 would be 6.5%. In contrast, the government’s latest estimate for the year is 7.6%. Considerable uncertainty continues to persist in West Asia, with shipping companies still hesitant to brave the Strait of Hormuz.

All of this, coupled with the fuel constraints, will continue to hamper growth in 2026-27. The RBI lowered its growth forecast for the first quarter by just 0.1 percentage points, which might end up being an over-optimistic reading of the situation. The World Bank’s India Development Update report, released on Thursday, predicts a slowdown in industrial growth in India over the course of this financial year. Consumer and government demand, too, is expected to slow as both groups try to tighten their belts. Inflation, on the other hand, is expected to accelerate considerably to 4.6%, according to the RBI. Yet, the MPC was correct not to raise rates since most of the inflationary pressure is due to supply issues rather than demand conditions. Raising rates would not only have slowed growth further, but even the primary objective of containing inflation would not have been met. A lot of factors need to play out before monetary policy can act — the war, the U.S. tariff-related investigations, greater clarity on a potential El Nino impact on the monsoon this year, to name a few. Until then, inaction is the best course of action.