RBI's bold rate cut signals growth focus as Budget nears

Reserve Bank of India (RBI) delivered an unexpectedly "strong, aggressive and forward-looking" monetary policy on Friday, cutting the repo rate by 25 basis points (bps) to 5.25 per cent despite the recent upside surprise in GDP data. The MPC voted unanimously for the reduction and supplemented it with liquidity support via a Rs 1 lakh crore OMO purchase and a $5-billion rupee-dollar swap over three years.

Aditi Nayar, Chief Economist at ICRA, told Business Today that the cut came even though markets were broadly expecting a pause after the GDP print. She highlighted Governor Sanjay Malhotra's assertion that "benign inflation is allowing us to remain growth supportive," noting that inflation projections have been revised down to 2 per cent while growth forecasts were raised to 7.3 per cent. The liquidity measures, she said, will likely be welcomed by markets.

Rumki Majumdar, Economist at Deloitte, said the rate cut appears driven by sluggish credit growth despite a cumulative 100-bps reduction earlier. "Credit has to go up at least 15–16 per cent to ensure the growth that we've seen over the last three quarters sustains," she said, calling the policy a "pre-emptive" step to support demand.

On the rupee, Subramanian Sharma, Founder Director at Greenback Advisory Services, attributed the Indian currency's recent depreciation to technical pressures such as $16 billion in FII outflows and lower RBI intervention. He expects the currency to trade between 89.50 and 90.50 in the near term, but sees room for appreciation early next year if US-India tariff discussions progress. "I would not be surprised if the rupee correct by at least 2 per cent … 88–88.50 levels could be seen as we go ahead in the new year," he said.

Majumdar added that the RBI may be intentionally allowing some depreciation, as a weaker rupee "helps in cushioning the higher prices" exporters face due to tariff-related uncertainty.

Looking ahead to the Union Budget, Sharma said capital expenditure must remain the centrepiece of the government's strategy. "Growth and capital expenditure should be the bigger driver," he noted.