Reserve Bank’s mixed signals: Rate cut & stance shift stir policy confusion
New Delhi: The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday delivered a 50 basis point cut in the policy repo rate to 5.50 per cent, while simultaneously shifting its monetary stance from ‘accommodative’ to ‘neutral’. While the rate cut is intended to frontload support for a still-recovering economy, the move has left analysts puzzled over the central bank’s evolving communication strategy — raising questions about policy consistency and clarity.
For much of the past year, the RBI has maintained an explicitly accommodative posture, cutting rates and infusing liquidity to boost growth amid persistent global and domestic headwinds. With headline inflation now declining steadily — reaching 3.2 per cent in April, its lowest since late 2018 — the central bank has found renewed room to act. The MPC revised its inflation projection for FY26 down to 3.7 per cent from the earlier 4 per cent, citing what it called a “durable alignment” with the 4 per cent target.
Yet, the concurrent change in stance to neutral seems to contradict the aggressive rate cut. “It’s a bit of a mixed message,” said Gaura Sengupta, Chief Economist at IDFC FIRST Bank. “A 50 bps cut implies urgency to support growth, but the shift to neutral indicates the RBI may be done with rate cuts. It sets a higher bar for future easing.”
The tension between the rate action and the stance has unsettled parts of the market. “They are trying to signal the end of the easing cycle while still easing aggressively — that confuses market participants,” said Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank. “The stance change clearly indicates that further decisions will be data-dependent, but the timing feels abrupt given that growth is still below potential.”
Indeed, the central bank acknowledged that growth “remains lower than our aspirations” and pegged FY26 GDP growth at 6.5 per cent. With subdued private consumption and cautious investment, the RBI argued that frontloading support was necessary. But as D.K. Srivastava, Chief Policy Advisor at EY India, noted, “This could have been achieved without changing the stance — the stance shift appears more forward-looking than necessary.”
Adding to the complexity was the RBI’s decision to reduce the cash reserve ratio (CRR) by 100 basis points in a staggered manner, a move expected to inject Rs 2.5–2.6 lakh crore into the banking system. This step reinforces the growth-supporting bias but sits uneasily alongside the signal of neutrality. “It’s stimulus by another name,” said Sachin Sachdeva, VP at ICRA Ratings. “They’re easing liquidity even as they claim to move away from an accommodative approach.”
The overall communication has raised concerns that the RBI is attempting to balance too many objectives at once — anchoring inflation expectations, maintaining financial stability, and supporting growth — without clearly prioritizing among them. “The central bank is walking a tightrope,” said Nomura in a client note. “It wants to reassure markets that it still has room to act, while simultaneously preparing for a pause. But this dual signalling introduces avoidable ambiguity.”
The shift to a neutral stance does provide flexibility, at least in theory. It allows the RBI to either pause or hike, should inflation resurface. But with inflation currently under control and global uncertainty persisting, few expect a rate hike anytime soon. Still, by declaring limited space for further accommodation, the central bank may be boxing itself into a corner.
Markets have reacted cautiously. Bond yields softened slightly in response to the rate cut, but expectations of deeper easing are now tempered. Some analysts still forecast a terminal repo rate of 5.00 per cent, but they now anticipate a pause in August. “The June decision feels like the RBI is trying to exit the easing cycle while squeezing in one last cut,” said a Mumbai-based fund manager.
Ultimately, the June policy review marks a turning point — not just in terms of rate direction but also in the RBI’s broader monetary policy framework. The central bank is clearly leaning into its inflation-targeting mandate, embracing a more data-dependent and cautious approach. However, in doing so, it has introduced communication risks.
Whether the RBI’s new stance ultimately restores policy clarity or contributes to further market uncertainty will depend on how transparently it navigates the months ahead. For now, the central bank has opened the door to a more mature policy regime — but has left it only half open.
