While the economy will wait for a rate cut in December, the banking industry should be happy with the wave of liberalisation -- a big push for growth in bank credit, points out Tamal Bandyopadhyay.
Those who were expecting a pre-Diwali gift from the Reserve Bank of India on Wednesday, October 1, are disappointed, as the central bank's Monetary Policy Committee (MPC) decided to leave the policy repo rate unchanged at 5.5 per cent.
But not too many will be surprised if RBI Governor Sanjay Malhotra plays Santa Claus in December, bringing an early Christmas.
Yes, after the status quo at two successive monetary policies, there could be a rate cut at the next policy in December.
Indeed, the RBI has left both the policy rate and stance of the policy unchanged, but there is a not-so-subtle change in the governor's statement.
Malhotra has made a point that the current macroeconomic conditions and the outlook have opened up policy space for further supporting growth.
Why did the RBI not bite the bullet now?
Well, the impact of the frontloaded monetary policy actions and the recent fiscal measures are still evolving.
Besides, trade-related uncertainties are unfolding too. At this juncture, the MPC thinks it is prudent to wait for the impact of past policy actions to play out, and greater clarity to emerge, before charting the next course of action.
After a one-percentage-point cut in the repo rate in three tranches -- between February and June this year -- the MPC had left the rate unchanged at 5.5 per cent in August.
It had also stuck to the 'neutral' monetary policy stance.
Both decisions of the six-member rate-setting body were unanimous at the last policy.
This time around, two MPC members were in favour of changing the stance to 'accommodative'.
Once again, the RBI has pared its inflation estimate for the year -- for the third time in a row, after doing so both in June and August.
It is now projecting the consumer price index (CPI) -based inflation rate for 2025-26 at 2.67 per cent.
In August, it had been pared from 3.7 per cent to 3.1 per cent, and before that, in June, from 4 per cent to 3.7 per cent.
For the first quarter of 2026-2027, the RBI's projection for CPI-based inflation is 4.5 per cent.
The inflation outcome is likely to be softer, primarily on account of cuts in goods and services tax (GST) rates and benign food prices.
Finally, the RBI has raised the real gross domestic product (GDP) growth estimate for the current financial year from 6.5 per cent to 6.8 per cent.
How will the RBI cut the policy rate in December after raising its estimate for GDP growth for the year?
India's economy grew at a faster than expected annual rate of 7.8 per cent in the quarter ended June, picking up from 7.4 per cent in the previous three months.
We need to look at the central bank's growth estimate in the subsequent quarters.
The real GDP growth projection is 7 per cent for the second quarter, 6.4 per cent for the third, and 6.2 per cent for the fourth. And for the first quarter of 2026-2027, it is 6.4 per cent.
The risks are evenly balanced both for inflation and growth projections.
Clearly, the RBI sees the growth momentum slowing progressively. This is when the uncertainties on the tariff turf are still alive.
But even with the growth slowing, can it go for a rate cut when inflation is set to rise?
It is estimated to be 4.5 per cent in the first quarter of 2026-2027.
After all, the RBI's flexible inflation target is 4 per cent with a two-percentage-point band on either side.
Well, it can. It has revised downwards the headline inflation projections for the fourth quarter of 2025-2026 and the first quarter of 2026-2027.
Both these figures are 'broadly aligned with the target, despite unfavourable base effects'.
Besides, the core inflation -- non-oil, non-food inflation -- for this financial year as well as the first quarter of the next year is also expected to remain contained.
So, it will not come in the way of a rate cut.
The bond market took the cue from the policy statement as well as Governor Malhotra's interaction with the media after presentation of the monetary policy.
The 10-year bond yield, which closed at 6.58 per cent on September 30, rose to 6.60 per cent on October 1 morning, but ended the day at 6.52 per cent.
The equity market also gave a thumbs-up to the policy and most bank stock rose following a series of measures announced by the central bank which will open up new business opportunities for banks and help them cut costs.
For instance, the RBI is introducing risk-based premiums which banks would pay for deposit insurance cover.
Since 1962, all banks -- irrespective of their size and strength of balance sheet -- have paid equal premium (12 paise per Rs 100 worth of deposits).
From 2026-2027, this will change -- stronger banks will presumably pay lower premiums.
Banks are also being allowed to finance mergers & acquisitions of corporations -- a longstanding demand of the industry.
The RBI is working on creating a framework for banks to finance acquisitions by Indian corporations, raise the loan limits against shares, units of real estate investment trusts (Reits) and infrastructure investment trusts (Invits) and abolish the ceiling on loans against listed debt securities.
It has also raised the limit of financing initial public offerings and loans against shares for individuals.
What more, the banking regulator has removed the limit on credit exposure of a bank to large corporations.
Introduced in August 2016 in the thick of the cleanup drive of bank balance sheets, which were laden with piles of bad loans, the limit was meant to address concentration risk and encourage large companies to access the market for funds.
From now on, the RBI will look at the concentration risk at the banking system -- not individual banks -- as they seem to be managing this well on their own.
The RBI is also giving enough time to the banking industry to implement the expected credit loss framework.
It will start in April 2027 with a four-year glide path for implementing it, till March 2031.
This will smooth the impact of higher provisioning requirements on banks' balance sheets.
While the economy will wait for a rate cut in December, the banking industry should be happy with the wave of liberalisation -- a big push for growth in bank credit.
Feature Presentation: Aslam Hunani/Rediff
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