RBI Governor Sanjay Malhotra Signals Potential Rate Cuts If Inflation Eases Further

June 17, 2025 | Mumbai | Monetary Policy & Inflation Update

Reserve Bank of India (RBI) Governor Sanjay Malhotra has indicated that the central bank could consider further repo rate reductions if the inflation trajectory continues to undershoot projections. Speaking in a comprehensive interview with Business Standard just days after the Monetary Policy Committee (MPC) slashed the policy repo rate by 50 basis points to 5.50 percent, Malhotra emphasized that policy flexibility remains intact. While acknowledging that the central bank has moved from an “accommodative” to a “neutral” stance, he stressed that this shift should not be misinterpreted as a hard stop on easing. His remarks come amid growing anticipation among market participants about the RBI’s next steps in response to falling retail inflation and mixed economic indicators.

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Inflation Undershooting May Unlock Policy Space for Future Rate Easing

Governor Malhotra’s statement that further easing is possible if inflation remains below the RBI’s projections suggests a clear pivot toward data-dependent policymaking. He asserted that if the inflation outlook continues to surprise on the downside, the RBI would gain more “policy space,” effectively reopening the door for additional rate cuts. May 2025’s consumer price inflation (CPI) figure came in at 2.82 percent, close to the RBI’s Q1 FY26 projection of 2.9 percent, with the April-May average settling at just 3.0 percent. These benign inflation prints are significantly lower than the central bank’s historical comfort threshold of 4 percent, signaling room for a more supportive monetary stance without jeopardizing macroeconomic stability. The governor reiterated the MPC’s commitment to evaluating “incoming data and the evolving outlook” to guide the policy path forward.

Highlights

• Inflation of 2.82% in May aligns with RBI’s Q1 FY26 forecast.

• Further rate cuts possible if inflation remains below projections.

• Policy approach remains data-dependent and flexible.

• RBI aims to maintain balance between growth and price stability.

Understanding the ‘Neutral’ Stance: Neither Hawkish Nor Dovish, Says RBI Chief

Clarifying the rationale behind the shift in policy stance, Governor Malhotra emphasized that the new “neutral” position should not be construed as a signal against further rate reductions. Rather, it reflects the central bank’s current policy setting, which maintains the possibility of both easing and tightening, depending on the macroeconomic environment. “Neutral by definition is neither hawkish nor dovish,” Malhotra said, underlining that the change from “accommodative” is more a technical recalibration than a strategic reversal. By distancing the RBI from a predefined policy bias, the neutral stance allows the MPC greater latitude to respond to unexpected shifts in economic activity, inflation, and global monetary developments. This flexibility is crucial, especially given the uncertainties surrounding oil prices, monsoon patterns, and global interest rate cycles.

Highlights

• Neutral stance enables both rate hikes and cuts, depending on data.

• Stance shift is technical, not necessarily indicative of policy tightening.

• RBI seeks to retain maximum agility amid economic uncertainty.

• Monetary response to be calibrated as per real-time macro inputs.

June 6 Policy Decision Reflects Proactive Support for Growth Recovery

On June 6, 2025, the RBI surprised the markets by announcing a larger-than-anticipated 50 basis point cut in the repo rate, bringing it down to 5.50 percent. The central bank also reduced the Cash Reserve Ratio (CRR), signaling its commitment to enhancing liquidity and supporting a sluggish demand environment. Governor Malhotra defended the magnitude of the rate cut, stating that the easing move was fully backed by prevailing macroeconomic conditions. The decision was made in light of falling inflation, easing input costs, and subdued private consumption and investment. He noted that with inflation well within the comfort zone and core inflation exhibiting a declining trend, the RBI could afford to prioritize growth without compromising its inflation mandate. The move reflects a proactive stance aimed at anchoring market sentiment and stimulating credit expansion across sectors.

Highlights

• RBI cut repo rate by 50 bps to 5.50% on June 6, 2025.

• CRR reduction also introduced to boost systemic liquidity.

• Easing backed by low inflation and tepid domestic demand.

• Growth-supportive shift made without breaching inflation mandate.

Inflation Forecasting, Data Vigilance Key to RBI’s Forward-Looking Policy

Malhotra also shed light on the RBI’s inflation projection methodology, emphasizing that the June MPC decision was based on careful evaluation of current and expected inflation data. With headline inflation averaging 3.0 percent in the first two months of Q1 FY26, the RBI has greater clarity on short-term price dynamics. However, the governor was cautious about overcommitting, reiterating that the central bank will continue to monitor evolving risks, including food price shocks, supply chain disruptions, and geopolitical developments that may affect import prices. The emphasis on data vigilance reflects the RBI’s intention to avoid premature or over-aggressive policy moves. Instead, the central bank seeks a calibrated, forward-looking approach that can dynamically respond to inflationary or deflationary pressures in real time.

Highlights

• Q1 FY26 inflation forecast set at 2.9%, actual average at 3.0%.

• RBI emphasizes data vigilance amid uncertain global backdrop.

• Policy decisions to be guided by real-time economic indicators.

• Avoiding premature policy shifts remains a key concern.

Investor and Market Implications as Policy Cycle Evolves

Malhotra’s carefully worded interview has significant implications for bond markets, equity investors, and currency traders. The openness to further rate cuts is expected to trigger renewed interest in government securities, with the 10-year G-sec yield already showing signs of softening. Equity markets, particularly rate-sensitive sectors such as banking, real estate, and auto, are likely to benefit from enhanced credit availability and lower borrowing costs. At the same time, the neutral stance reinforces the RBI’s credibility by preventing runaway expectations of a prolonged rate-cutting cycle. For the Indian rupee, a dovish tilt without a loss of monetary discipline is seen as a stabilizing factor, especially if accompanied by steady foreign inflows. Analysts suggest that if inflation continues to remain below 3 percent, the RBI may opt for another 25–50 bps cut in the next two quarters.

Highlights

• Bond yields declining in response to potential for more rate cuts.

• Rate-sensitive stocks may rally as credit conditions ease.

• Rupee stability expected amid balanced policy messaging.

• Markets now pricing in further 25–50 bps cut over next 6 months.

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