Making hay while inflation isn't hot

Rarely does a central banker face a Goldilocks moment. Sanjay Malhotra and his co-members in MPC didn't let the opportunity slip, slashing the repo rate by 25 bps to 5.25% on Friday. It's a great time to cut interest rates and amplify the tax stimulus announced by GoI over the course of the year. Better still, Mint Road has turned on the liquidity tap, as the odds of the economy overheating appear slim. The sum of this year's interest rate cuts is the most aggressive since the pandemic-era monetary easing, and there's still some steam left. Another rate cut, and more liquidity injections could be in the offing.

Part of a central banker's job is to talk down prices - but not the reverse. Malhotra's messaging remains upbeat, with inflation expectations firmly anchored and market confidence sustained. Investors largely shrugged off RBI's upward revision of growth and downward revision of inflation, signalling resilience. The economy now faces a prolonged period of low rates, which should continue supporting debt and equity markets, though the rupee will bear the brunt of US tariffs. Delays in finalising a US trade deal continue to weigh on headline stock indices, but a Fed rate cut this month could spark a Santa Claus rally in India.

Easing, alongside an anticipated interest rate cut, should accelerate monetary transmission and lower credit costs. The banking regulator's efforts to extend financial sector deregulation do not stop there. RBI has allowed banks to operate multiple entities in the lending business, reversing a regulatory guideline issued last year. Rules for non-financial holding companies to operate MF, insurance and pension businesses have also been relaxed. Incremental deregulation should improve the financial sector's ability to function as an intermediary.