Reserve Bank of India’s monetary policy focuses on growth

In the monetary policy announced by the Reserve Bank during the first week of April, the central bank delivered a strong message by keeping the repo rate and other policy interest rates unchanged, and simultaneously maintaining its stance as ‘Neutral’ (or status quo). This signals that, despite rising crude oil prices, supply chain disruptions, blockages in international

trade routes, and global turmoil, India’s policymakers remain confident in the country’s economic fundamentals and are committed to sustaining a growth-conducive environment within the nation.

Prior to the monetary policy announcement, however, apprehensions were being voiced that the trajectory of successive repo rate reductions — which had been pursued through 2025 — might face reversal. It was feared that, driven by inflationary expectations, the repo rate could either be hiked or, at the very least, the monetary policy stance might be downgraded from ‘Neutral’ to ‘Accommodative’.

However, dispelling these apprehensions, the economic outlook presented by the Reserve Bank demonstrates that — notwithstanding global turmoil and challenges — the economy remains in a robust position. Consequently,

maintaining the repo rate at 5.25 per cent is deemed an appropriate policy measure to keep the path of economic growth unhindered. It is noteworthy that by keeping the repo rate low through its monetary policy, the Reserve Bank can stimulate domestic investment as well as the demand for durable goods and housing, thereby paving the way for accelerated economic growth. However, the primary prerequisite for lowering the repo rate is that domestic inflation levels must be low. If inflation is high — or if future inflationary expectations are elevated —reducing the repo rate could potentially exacerbate inflation further. Therefore, in a scenario where inflation is running high, the central bank (the RBI) cannot afford to take the risk of lowering the repo rate. However, despite the prevailing geopolitical landscape, fears of rising inflation, and disrupted supply chains, the Reserve Bank has undertaken the crucial task of keeping the engine of growth running by making the difficult decision to maintain the repo rate at a steady level — a move involving a calculated risk.

Inflation and growth expectations

Inflation forecasts suggest that the rate is likely to range between 4.5 per cent and 4.6 per cent in the year 2026-27. Although this figure is significantly higher than the 2.1 per cent inflation recorded in 2025-26, it is still projected to remain within the target range of 2 per cent to 6 per cent set for the Monetary Policy Committee. As per the monetary policy framework effective April 2026, the formulation of monetary policy must ensure that inflation remains within the band of 4 per cent (plus or minus 2 per cent). Consequently, should there be any risk of this limit being breached, it becomes imperative to raise the repo rate and adopt other measures to tighten monetary conditions. It is for this reason — given that inflation currently remains within the prescribed limits set for the Monetary Policy Committee — that the Reserve Bank has decided to keep the repo rate unchanged.

Growth outlook

The Reserve Bank has pegged growth prospects for 2026-27 at 6.2 per cent. Notably, GDP growth is expected to stand at 7.4 per cent in 2025-26. This implies that there is a possibility of a decline in growth, albeit a marginal one. It is worth noting that the potential impact of global turbulence on growth has not swayed the Reserve Bank from its stance. The underlying reason for this is the robust fundamentals of the Indian economy, which ensure that global volatility will not be able to undermine India’s growth prospects.

Liquidity management

It is essential to understand that maintaining liquidity at an optimal level is just as crucial as keeping the repo rate low, ensuring that short-term interest rates remain anchored around the repo rate. To achieve this, the Reserve Bank manages liquidity using instruments such as Open Market Operations (OMO), variable repo rates, and variable reverse repo rates. Through these instruments, the Reserve Bank ensures that appropriate liquidity levels (neither too low nor too high) are maintained, thereby ensuring that the call rate — specifically the Weighted Average Call Rate (WACR) —does not exceed the repo rate by more than 0.10 to 0.15 percentage points. The call rate is the interest rate at which a bank borrows funds from other banks for the short term.

Currently, a major challenge confronting Indian banks is that their credit growth continues to significantly outpace their deposit growth. To bridge this gap, banks are compelled to borrow funds at interest rates higher than their lending rates. This situation has arisen because, for some time now, individuals have been channeling their savings into mutual funds rather than depositing them in banks. The Reserve Bank will need to find a solution to this issue as well.

It must be recognised that, through its monetary policy, the Reserve Bank endeavors to achieve a diverse range of objectives and targets. It is gratifying to note that, thanks to appropriate policy measures, Indian banks have largely overcome the problem of ‘NPAs’ — or Non-Performing Assets. The overall health of the banking sector is improving. Through monetary policy, inflation is being brought under control on one hand, while economic growth is gaining momentum on the other, thanks to lower policy interest rate.

As digitisation helps reduce operational costs for banks, the Reserve Bank is poised to play a pivotal role in guiding the nation toward its goal of becoming a developed economy. To realise the objective of self-reliance, banks must ensure an adequate flow of credit while simultaneously ensuring the timely repayment of loans; this necessitates rigorously vetting credit proposals against the criterion of repayment capacity. It is reasonable to anticipate that the monetary policy announced in April will prove instrumental in achieving these developmental goals.

Despite global headwinds, the RBI has been able to steer the rupee towards relative stability, even after a sharp depreciation of more than 4 per cent in a short span, through a judicious mix of policy measures and direct interventions in the foreign exchange markets. These include curbs on speculative activities, which have historically been a major cause of significant volatility in the rupee’s value.

Now, the challenge before the RBI is to ensure that growth prospects are not adversely affected by the global scenario marked by wars and conflicts, disruptions in global value chains, and blocked international trade routes.

A firm monetary policy, focused at growth with stability, by preventing a rise in interest rates and providing sufficient liquidity to to boost growth and at the same time, keeping inflationary tendencies under check would be crucial. The RBI’s task will be formidable in ensuring adequate credit flow, managing liquidity, keeping inflation under control, and providing a boost to growth.

The writer is a National Co-convener, Swadeshi Jagran Manch Former Professor, PGDAV College and University of Delhi ; views are personal