India Monetary Policy - part.1

Over the past two weeks, India's monetary policy has been characterized by a cautious and measured approach, reflecting the Reserve Bank of India's (RBI) commitment to balancing economic growth with price stability. In its August 2025 meeting, the RBI's Monetary Policy Committee (MPC) decided to maintain the repo rate at 5.5%, pausing the easing cycle that had seen a cumulative 100 basis points cut earlier in the year. This decision was influenced by global uncertainties, particularly the potential impact of U.S. tariffs on Indian exports, and the need to assess the transmission of previous rate cuts into the economy.

Governor Sanjay Malhotra emphasized that the RBI has not lost sight of its growth objectives, stating that financial and price stability are enablers of economic progress. He assured that the central bank would continue to provide ample liquidity to support the banking sector and broader economy. The RBI also addressed the impact of recent U.S. tariffs on Indian exports, noting that 45% of sectors remain unaffected and expressing optimism about ongoing trade negotiations and free trade agreements to limit potential risks.

In addition to its policy rate decision, the RBI released a discussion paper inviting stakeholder feedback on whether to maintain the current 4% inflation target or adjust it, considering the evolving economic landscape. The central bank emphasized the importance of policy certainty and credibility, especially in uncertain times, and cautioned that raising the target could be seen as weakening the framework, while lowering it could lack credibility amid global food price pressures.