The Hindu Editorial Analysis
8 August 2025
Time for action
(Source – The Hindu, International Edition – Page No. – 8)
Topic : GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
Context
The Reserve Bank of India made a prudent choice by pausing rate cuts in the face of prevailing uncertainties.
Introduction
The RBI’s decision to pause further rate cuts reflects a cautious stance amid rising global uncertainty. With unresolved tariff tensions, ongoing trade negotiations, and recent monetary easing yet to take full effect, the central bank has opted for strategic patience. This measured approach underlines the need for complementary fiscal action to support India’s growth and stability.
RBI’s Sensible Pause Amid Global Uncertainty
- On August 6, 2025, the RBI’s Monetary Policy Committee paused rate cuts after a cumulative 100 bps cut since February.
- Governor Sanjay Malhotra cited ongoing uncertainty in global trade, particularly evolving tariff scenarios.
- The decision came before the U.S. imposed an additional 25% tariff on Indian imports, escalating trade tensions.
- India is still negotiating a Bilateral Trade Agreement with the U.S., and final tariff levels are not yet decided.
- Additional U.S. penalties on countries purchasing oil from Russia could erode India’s competitive advantage.
Strategic Flexibility for Future Decisions
- By holding rates steady, the RBI leaves room for future action depending on how the global and domestic landscape evolves.
- The central bank wants to wait and observe the effect of past rate cuts before initiating more.
- This approach reflects policy prudence rather than inaction, helping prevent premature or ineffective moves.
Transmission of Rate Cuts Still in Progress
- The 100 bps rate cut since February is still working its way through the financial system.
- The RBI noted ample liquidity in banks, indicating that they have enough funds to lend.
- However, slow transmission of lower rates to consumers and businesses remains a concern.
- The pause allows time to assess whether cheaper credit is reaching borrowers and impacting real activity.
Weak Credit Demand Signals Deeper Issues
- Despite liquidity, credit uptake is weak, especially in key consumer sectors:
- Consumer durable loans fell by 3% year-on-year.
- Housing loan growth dropped from 36% to 9.6%.
- Vehicle loans also slowed by 5 percentage points.
- Industrial credit growth declined to 5.5% in June 2025, down from 8.1% a year ago.
- These trends indicate that rate cuts alone are not enough to revive demand or investment.
The Need for Coordinated Fiscal Action
- Governor Malhotra stressed that monetary policy alone can’t ensure growth; structural and fiscal policies must support it.
- The government must act decisively by:
- Rationalising GST rates, a long-pending reform.
- Reducing fuel prices in line with global oil rates to boost consumer confidence.
- While the RBI can afford to wait, the government must take proactive steps to stimulate demand and support the economy.
Conclusion
While the RBI adopts a prudent wait-and-watch approach, the responsibility now shifts to the government. Mere monetary policy is insufficient to revive the economy. Targeted fiscal interventions, including tax reforms and fuel price rationalisation, are essential to stimulate demand. A coordinated policy response will be key to ensuring sustainable growth in a challenging global environment.