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For over a year, the Reserve Bank of India (RBI) has taken a firm stance against inflation, raising interest rates by 250 basis points between May 2022 and February 2023 in response to post-pandemic price pressures.

The RBI’s recent decision to maintain the key interest rate at 6.50%  while adopting a “neutral” policy stance marks a significant shift in its approach to balancing inflation control with economic growth. This move, following 10 consecutive meetings of holding rates, suggests that rate cuts may be on the horizon.

The implications of this decision for India’s economic trajectory are considerable. While it is widely acknowledged that inflation has cooled in recent months, retail inflation has dipped below the central bank’s 4% target, underlying risks remain.

The RBI continues to proceed with caution, recognizing that while inflation may be under control for now, geopolitical tensions and weather-related disruptions could reignite price pressures, particularly in the food and fuel sectors.

The timing of the RBI’s policy shift is notable, as it coincides with growing signs of an economic slowdown. Global demand is weakening, and domestic consumption is showing signs of strain. By signaling potential rate cuts later in the year, the RBI appears to be preparing to pivot towards growth support.

This shift is a calculated step. By adopting a neutral stance, the RBI is preserving flexibility in its monetary policy, allowing it to respond to inflation spikes if necessary or to ease rates should growth indicators worsen.

Such a balancing act is critical, as monetary policy must remain agile in the face of evolving domestic and global challenges. Compared to its global counterparts, the RBI has been slower to cut rates. Central banks like the US Federal Reserve have already begun easing their policies to stimulate economic growth.

In contrast, the RBI has taken a more cautious approach, waiting for clearer signs of inflation stability before acting. However, any upcoming rate cuts are expected to be measured. The central bank is unlikely to adopt an aggressive easing stance, as inflation risks still linger.

Instead, the RBI is likely to opt for incremental cuts, signaling support for growth while maintaining its inflation-fighting credibility.