In firing a policy bazooka to support growth, India’s central bank may have overlooked the consequences for its mandate

Contrast that with the trials of Sanjay Malhotra, appointed the 26th governor of RBI on 9 December 2024. Thanks to the shenanigans of the 47th President of the United States, Donald Trump, there seems to be no end to Governor Malhotra’s ‘baptism by fire’!

Just days before his first Monetary Policy Committee (MPC) meeting in early February, President Trump fired his first salvo, signing three executive orders levying tariffs on Mexico, Canada and China.

By the next MPC meet in early April, Trump had fired his ‘Liberation Day’ bazooka, levying ‘reciprocal tariffs’ on most countries, including India. There’s been no let up since. Tariffs have been raised from 25% to 50%, exemptions have been granted selectively (arbitrarily?), our oil imports from Russia have come under fire, as also our exchange rate management. Meanwhile, US arm-twisting on an elusive US-India trade deal continues.

It is against this background that Governor Malhotra chaired his sixth and last MPC meet in 2025. But if the MPC had any anxieties about how the actions of a whimsical man in the White House could affect us, Governor Malhotra’s statement, just four days short of the anniversary of his first year in office, gave no hint of it. On the contrary! The T (tariff) word does not appear even once in the policy statement.

And, despite past GDP and inflation estimates being way off the mark, the MPC is surprisingly confident (some would say, overconfident) and upbeat.

Consider. Assuming the MPC had wrestled with the all-important question of whether an economy that grew 8.2% in the last quarter, and is expected to grow well this year and the next, needs any support, what explains its somewhat puzzling response?

That growth needs support; not just a rate cut of 25 basis points that typically takes three to four quarters to work its way through the system. But also, immediate and extraordinary liquidity support: open market purchases of ₹1 trillion in December and a three-year dollar- rupee buy-sell swap of $5 billion. All this in the background of both ‘resilient’ growth—an upwardly revised GDP growth estimate of 7.3%, up from 6.8% in October, and system liquidity averaging a surplus of ₹1.5 trillion.

To be sure, the MPC had given a hint of its thinking in its October policy announcement, when it stated, “The current macroeconomic conditions and the outlook has opened up policy space for further supporting growth.”

But the question it ought to have asked itself is not whether there is ‘space’ for a rate cut. Rather, whether there is a need for a rate cut. Does the balance of risks justify a further rate cut when the impact of the demand boost from the 100-basis-points reduction in the repo rate this year and CRR (cash reserve ratio) cut is yet to play out fully?

Remember, a depreciating currency adds to inflationary pressures; this year’s fall in inflation is primarily due a fall in food and fuel inflation, partly due to a high base for food inflation and soft fuel prices. These could just as quickly reverse. Core inflation, meanwhile, has hugged the 4% mark for most of the year. To claim that core inflation excluding gold is closer to 2% is hair-splitting.

As Chair of the US Federal Reserve Jerome Powell once remarked, “Monetary policy should not be on a pre-set course.” Members of the policy rate-setting committee are expected to make decisions based on their “assessment of the data, its implications for the economic outlook and the balance of risks.” The key words being ‘assessment’ and ‘balance-of-risks.’ And this is where the puzzle deepens.

While all MPC members work with the same data, one would expect individual assessments to vary. Unless they are victims of group- think. This is entirely possible—nay, probable—in the case of RBI officials who would understandably find it difficult to disagree with the governor. Yet, going by the unanimous vote, not one of the external members seems to have any qualms that a further rate cut and liquidity bonanza could be an overdose, endangering RBI’s primary mandate of price stability.

Like chief economic advisor V. Anantha Nageswaran, who admitted he wasn’t losing any sleep over the rupee’s depreciation, and former prime minister Manmohan Singh, who confessed as much vis-à-vis the antics of the stock market in 1992, it seems fair to surmise that MPC members aren’t losing any sleep. Despite all the ‘unknown unknowns’ in the macro space! That is good news. We do want our policymakers to sleep well. But when seasoned stock market observers describe the policy as “everything the market wanted,” it is perhaps time to worry.

Are the interests of the market the same as that of the person on the street? More importantly, should RBI work for the welfare of all Indians or only the market?

The author is a senior journalist and a former central banker.