Monetary Policy At A Crossroads: A Conversation With Dhananjay Sinha

As the Reserve Bank of India prepares for its monetary policy review, expectations are high. Many market participants anticipate a rate cut, while others argue that the central bank should hold firm. In a conversation, Dhananjay Sinha, Co-Head of Equities and Head of Research at institutional brokerage Systematix Group, shares his views with BasisPoint Insight on the economic landscape, inflation risks, and the broader debate on monetary and fiscal policy.

Edited transcript of the video interview: 

Many expect the RBI to cut rates tomorrow. Should it?

The market consensus strongly leans towards a 25-basis-point cut. Around 80-90% of analysts expect it.

However, we believe the RBI should hold rates. Inflation remains a concern, and the effectiveness of a rate cut at this stage is questionable.

Why should the RBI hold rates?

The RBI’s primary mandate is price stability and growth. Inflation is well above the 4% target, hovering around 5.2-5.4%.

Over the past decade, inflation has exceeded 4% about 84% of the time. Even in recent years, it has averaged 5%, while private consumption growth has remained weak at around 4%. Cutting rates now may not be prudent.

What are the arguments in favour of a rate cut?

The government and some market participants argue that monetary policy is too restrictive and is holding back private capex.

GDP growth recently fell to 5.4%, below expectations. Given that potential growth is estimated at 7%, proponents of a cut believe monetary easing is needed to revive economic activity.

However, our analysis suggests the issue is more complex. Market expectations differ from economic fundamentals, and the RBI should prioritise long-term stability over short-term concerns.

Finance Secretary Tuhin Kanta Pandey recently said the Budget has created space for a rate cut by keeping revenue expenditure in check. Do you agree?

The government is keen on rate cuts, largely because interest payments account for about a third of its revenue expenditure.

India’s debt burden has risen sharply to ₹190 trillion, an increase of ₹100 trillion in just five years. Lower rates would help manage fiscal targets while sustaining spending.

Officials also argue that lower rates will spur private capex, but past trends suggest that rate cuts alone do not necessarily boost investment.

While the Budget has taken steps toward fiscal consolidation, the fiscal deficit remains elevated at 4.4% of GDP—still above the FRBM target of 3%.

The RBI has recently taken liquidity measures, including CRR cuts and OMOs. Do these hint at a rate cut?

Not necessarily. These are liquidity management tools, not indicators of a monetary policy shift.

The recent liquidity crunch was driven by RBI’s forex interventions to stabilise the rupee. In response, the RBI cut the CRR by 50 basis points and announced ₹600 billion in OMOs.

These moves ensure adequate liquidity but don’t signal an impending rate cut. Monetary policy is driven by inflation and growth dynamics, not short-term liquidity adjustments.

If the RBI doesn’t cut rates, could it announce another CRR cut to ease liquidity?

It’s possible, but CRR cuts are liquidity management tools, not monetary policy signals.

The key issue is forex intervention—if the RBI allows gradual rupee depreciation, further liquidity measures may not be needed.

On growth, who holds responsibility for reviving it, fiscal or monetary policy?

The debate assumes India’s potential GDP growth is 7%. But if structural growth has declined, blaming the RBI is misplaced.

Monetary policy is a cyclical tool; it cannot address structural issues like employment, industrialisation, and productivity. These require broader economic policies at both central and state levels.

Would it be fair to say fiscal policy is counter-cyclical while monetary policy is expected to be pro-cyclical?

Fiscal policy remains tight, focused on deficit reduction rather than stimulus.

Meanwhile, RBI policy is not overly restrictive—real rates, adjusted for inflation, are around 1.5%, lower than the 2% seen in previous inflation-targeting regimes.

What are your estimates for FY26 GDP growth and inflation?

The Budget assumes real GDP growth of 6.4%, with nominal growth at 10.1%.

However, household consumption—the real driver of economic activity—is growing at just 3.5-4%. This suggests structural growth is around 200 basis points lower than headline GDP figures.

Inflation is likely to average around 5.2% over the next 12 months.

Will the RBI cut rates tomorrow?

My expectation is that they will hold rates steady.

However, political and market pressures are high, and the government has been pushing for a cut. We’ll see if the RBI sticks to economic fundamentals or gives in to external pressure.