RBI Should Close the Door on Easing with a Stance Change

On the eve of the MPC’s pre-policy silent period, Sanjay Malhotra appears to have corrected an inference he had invited barely a month earlier. In his ET Now interview, the RBI governor said that, had the central bank wanted to prepare markets for rate increases, it would have moved from neutral to restrictive. In his subsequent Hindu BusinessLine interview last week, he said neutral permits a hold, cut or increase and that no stance change need precede policy action. In the latest interview, he also put price stability unambiguously first and acknowledged modest signs that inflation may be becoming generalised.

This may be a deliberate recalibration. The MPC should respond by shifting the stance to restrictive even if it continues to hold the policy repo rate at 5.25%.

The RBI began its rate-cutting cycle while maintaining a neutral stance in February 2025. It shifted to accommodative in April, returned to neutral while delivering a 50-basis-point cut in June, and cut rates again in December without changing the stance. Neutral has therefore accompanied the beginning, acceleration, and continuation of an easing cycle.

The June decision to stay neutral was built around waiting for greater clarity. Even then, the RBI had raised its 2026–27 inflation forecast to 5.1%, with inflation projected at 5.9% in October–December, while cutting its growth forecast to 6.6%.

Since then, headline inflation has moved above the 4% target. The RBI has already delivered 125 basis points of easing. The nominal policy rate now sits only marginally above its full-year inflation forecast. The balance of risks is no longer two-way in the same sense as when neutral was retained.

The world has hardened too. Global disinflation has stalled as energy and food costs rise. The Federal Reserve held rates in July, but three members wanted an increase. US long-term yields have risen, and the global easing cycle has fractured. A high-yielding dollar, volatile oil and safe-haven flows are pressing on emerging-market currencies.

India should neither shadow the Fed nor raise rates simply to defend a particular rupee level. But these global forces are no longer benign external scenery. They enter domestic inflation through energy prices, exchange-rate pass-through and the cost and availability of foreign capital. They also narrow the room for an emerging-market central bank to remain visibly open to further easing.

What would a restrictive stance achieve?

First, it would close the door on additional cuts without forcing an immediate increase. Second, it would tighten expectations before tightening loan rates, giving the MPC time to establish whether second-round effects are becoming durable. Third, it would align the signals from the policy rate, liquidity management and foreign-exchange operations. At the margin, it may discourage one-way currency positions and reduce some of the burden on reserve deployment, though it cannot determine the rupee’s level.

It would also clarify the policy assignment for New Delhi.

Monetary policy cannot take care of energy shocks, repair supply chains or handle El Niño. Fiscal and administrative tools must address fuel-price pass-through, food supplies, logistics and targeted relief. A restrictive stance should not be read by the government as hostility to growth. It would recognise that broad monetary accommodation is no longer the appropriate instrument for cushioning the shock in a challenging environment for monetary policy.

A restrictive label would create no new policy capacity, and there will be a cost.

Bond yields and funding expectations may harden. Restrictive should signal that the next move, if required, is more likely to be up, not promise that it will occur at the next meeting. If inflation fails to broaden, the stance can return to neutral. If expectations and prices begin reinforcing each other, the RBI should act.

Neutral suited the benign inflation environment in which the easing cycle was delivered. It is poorly matched to an oil shock, a firmer dollar, rising global yields and inflation approaching the tolerance ceiling. The August policy need not deliver a hike. It should deliver recognition. India should not meet a harder monetary world with an easing bias left ajar.