A Cut Too Cautious

India’s 25-basis-point rate cut has arrived in a macroeconomic environment that is, by any historical standard, extraordinary. Inflation has collapsed, growth remains robust, financial conditions are benign, and a broad deregulatory wave is slowly rewiring the economy beneath the surface. Against such a backdrop, the Reserve Bank of India’s decision to ease is welcome, even overdue. But the more important question now is not whether the MPC acted correctly — it did, but whether monetary policy could have delivered a stronger signal, and what fiscal strategy must now complement the central bank’s move.

Start with inflation, the anchor of India’s monetary regime. For the first time since flexible inflation targeting was adopted, headline CPI has decisively breached the lower end of the tolerance band, averaging 1.7 per cent in Q2 and falling to 0.3 per cent in October. Core inflation, after stripping out precious metals and volatile fuels, has drifted towards 2.6 per cent. In effect, underlying price pressures are closer to those of an economy facing slack rather than overheating. To insist on holding the repo at 5.5 per cent in the face of such data would have been to adopt asymmetry in monetary conduct, aggressive when inflation breaches the upper band, but timid when it undershoots the lower bound.

Indeed, as several analysts have noted, if inflation were sitting at 6 per cent, the overwhelming view would be that the RBI must tighten. By the same logic, inflation at 2 per cent should compel easing. Symmetry is not an academic nicety. It should be foundational to the credibility of an inflation-targeting regime. A central bank that reacts only in one direction undermines expectations in both.

The growth backdrop strengthens the case. Real GDP expanded 8.2 per cent in Q2, driven by a revival in manufacturing and the GST-induced loosening of real disposable incomes. Even with some softening in Q3, growth near 7 per cent for the full year is likely. Crucially, this growth has come amid a collapse in the GDP deflator. Nominal GDP, which had previously run well above real GDP, is now barely ahead of it. It should be a cause of concern.

This is where the broader reform environment becomes important. India in 2025 is deregulating at a pace unseen in decades. Quality Control Orders have been rolled back. The RBI has decluttered more than 9,000 circulars into 238 Master Directions. And a high-level committee on regulatory reforms is preparing India’s most ambitious deregulatory overhaul in modern history, seeking to flatten licensing burdens, streamline inspections, and shift towards a trust-based compliance architecture. The macro effects of such reforms materialise with a lag, but directionally, they position India in a rare sweet spot: domestic demand is resilient, corporate balance sheets are strong, and the supply side of the economy is finally being unclogged.

The risks today are therefore not internal. They are external and intensifying. The rupee’s breach of 90 against the dollar reflects not a loss of domestic confidence but a combination of new US tariffs on Indian exports, volatility in non-deliverable forward markets, and cyclical portfolio outflows. The delayed trade deal with Washington and the fact that Q3 export numbers will bear the imprint of tariff disruptions should have strengthened the case for a deeper rate cut. For a country that has relied on domestic demand as the primary engine of growth, cushioning the external shock with a stronger monetary signal would have been prudent.

To its credit, the RBI has delivered 125 basis points of easing this year, the steepest since 2019. Back then, policy was reacting to tumbling growth; this time, the trigger is rapidly falling inflation. The difference matters. When easing responds to weakness, it risks appearing defensive. When easing responds to disinflation, it amplifies credibility. Markets understand the distinction.

Still, the case for a 50-basis-point cut is strong. First, real rates remain high: with headline inflation near 2 per cent, the real policy rate sits above 3 per cent, one of the highest in the emerging-market universe. Second, deposit behaviour would not have been materially disrupted; savings are influenced by overall macro stability, not by minor quarterly adjustments in deposit rates. Third, transmission is still uneven. Lending rates linked to external benchmarks will fall quickly, but outstanding loans and corporate borrowing costs adjust more slowly. A front-loaded cut would have accelerated the move. Fourth, the external shock warrants insurance. Export-oriented sectors will face margin compression, and domestic demand must compensate. Monetary policy should lean against external drag, not wait for it to show up retrospectively in the data.

What, then, should fiscal policy do? A supportive monetary stance is necessary but not sufficient. With inflation low and financial conditions easing, fiscal authorities have the opportunity and the obligation to reinforce the growth impulse without sacrificing consolidation. Three priorities stand out.

First, accelerate public capex already budgeted but delayed in execution. The multiplier of infrastructure spending is highest when private balance sheets are healing and credit conditions are benign. Second, protect the fiscal consolidation path. Lower inflation has mechanically reduced nominal GDP growth, which worsens deficit ratios. The government must resist the temptation to treat disinflation as a licence for fiscal expansion. Credibility will be critical in anchoring bond yields as lending rates decline. Third, deploy targeted incentives in sectors exposed to tariff risk, electronics, engineering goods, and textiles, so that the external shock does not cascade into labour markets.

If fiscal policy delivers discipline and targeted support, and monetary policy remains symmetric and forward-looking, India could enter 2026 with a combination that most emerging markets can only envy: low inflation, solid growth, accelerating reforms, and a financial system flush with liquidity and confidence.

The MPC’s 25-basis-point cut is the right move. But in this rare Goldilocks moment, India could afford to be bolder. A 50-basis-point cut would have been equally justified, and perhaps more appropriate. As global uncertainties mount, a central bank should lean decisively into its sweet spot rather than tiptoe along its edges.

Views expressed are personal. The writer writes on macroeconomic issues.