Introduction to Monetary Policy
The Reserve Bank of India (RBI) has been using various tools to shift its strategy and nudge borrowers and lenders to act in a certain way. It all starts with some signalling, achieved largely through adjustment of liquidity and recalibration of benchmark rates as well as yield curves. Then comes nuanced communication, imploring economic agents to read between the lines, with the hope that this will help mould market expectations.
The Role of Signalling and Communication
In the final stage, there is active perception-building with pointed communication—both verbal and printed—to push economic activity along a chosen pathway. This is how many central banks usually try to shift strategy, hoping to nudge borrowers and lenders to act in a certain way. The RBI has now added controlled but explicit gesturing to the array of communication tools at its disposal.
Recent Policy Announcements
The monetary policy announcement of 1 October can be seen as a continuation of governor Sanjay Malhotra’s unique way of conveying economic distress and putting in place policy measures that will lead to higher lending and borrowing, and thereby induce stronger economic growth. The central bank is no longer beating about the bush; its concern for the economy is visible front and centre.
Interest Rate Cuts and Reform Measures
There was a broad-based expectation of an interest rate cut on the street, seen as the ideal cure for a slowing economy. But members of the monetary policy committee (MPC) felt otherwise, given that earlier rate cuts were yet to fully pass through the economy. The RBI has initiated a large number of reform measures through a suite of regulatory relaxations that it hopes will spark off a fresh bout of lending through banks and non-banking financial companies (NBFCs), thereby providing some financial tailwind to torpid growth impulses.
Easing of Restrictions and New Thresholds
The easing of previous strictures on lending for capital market operations—loans against shares or borrowing to finance mergers and acquisitions—mark the crossing of a new threshold. Many of these restrictive rules have been in place for many years, defying logic and carrying the stench of an older economic era. The reversal of the August 2016 policy limiting concentration risk is also significant, since it looks to provide an impetus to large corporate borrowing.
GDP Growth and Credit Trends
The motivation probably came from the central bank’s internal economic assessment, following which the April policy statement lowered its gross domestic product (GDP) forecast for 2025-26 to 6.5%. While the full year’s forecast has now been bumped up to 6.8% (largely because of the 7.8% print in April-June), RBI’s guidance shows growth tapering during the remaining quarters. There is another point to note: the central bank’s six-monthly monetary policy report, issued with the October policy, has forecast even lower GDP growth at 6.6% for 2026-27.
Credit Growth and Industrial Stagnation
Ironically, while slow credit growth has caught everybody’s attention, a GDP growth slowdown makes the credit-to-GDP ratio appear not so dismal. Data from the Bank for International Settlements shows India’s credit-to-GDP ratio at 93.3% as of March 2025. This is better than many of its peers in emerging and advanced economies: Greece, Mexico, Brazil, Turkey, South Africa, Poland and Indonesia. Interestingly, the data also shows India’s credit-to-GDP gap—the difference between current credit-to-GDP ratio and the long-term trend—at only minus 2.7%, indicating that credit growth is only marginally below its trend-line.
Conclusion
The RBI’s recent policy announcements and reform measures are aimed at stimulating economic growth and addressing the slowdown in credit growth. While the central bank has not ruled out interest rate cuts, it is focusing on other tools such as regulatory relaxations and communication to achieve its goals. The jury is still out on whether these measures will be enough to boost growth, but one thing is clear: the RBI is taking a nuanced and multi-pronged approach to addressing the challenges facing the Indian economy.
