RBI monetary policy 2025: Why bank has kept interest rate powder dry, as it pushes growth through easier regulations

However, the absence of an interest rate cut this week does not mean there is no space for it. As the MPC said in its statement, economic developments have been such that they have “opened up policy space for further supporting growth” — headline retail inflation is now expected to average a mere 2.6% in 2025-26, significantly lower than the RBI’s medium-term target of 4%. What the central bank has instead decided to do is to keep its powder dry and support growth through more structural routes.

“The policy was more than rates,” Anitha Rangan, RBL Bank’s Chief Economist, said. “The RBI’s message is growth support can come from other sources as well.” And there were plenty of other sources — 22 of them, to be precise.

Unshackling Indian banks

The RBI has, as it should, kept Indian banks on a tight leash to ensure the financial system is stable. And while it allows them some leeway and space from time to time, the decisions announced on Wednesday are far more than that.

One, banks are set to be permitted to finance acquisitions by Indian companies. This will, as Governor Sanjay Malhotra himself said, “expand the scope of capital market lending by banks”.

Two, a decade-old framework that discouraged lending to certain borrowers over and above a limit of Rs 10,000 crore or more for the entire banking system is set to be withdrawn. The framework looked to address risks arising from concentration of loans made by the banking system. Now, Malhotra said, “concentration risk at the banking system level, as and when considered necessary, will be managed through specific macroprudential tools”.

Three, infrastructure financing by non-bank lenders should get cheaper going forward once the RBI reduces the so-called ‘risk weights’ for the same when loans are given to operational and high-quality projects.

There have also been some other smaller decisions whose impact could be noteworthy in the long run. The RBI now plans to give out new licenses for urban co-operative banks, with the first step being the publication of a discussion paper on the same. Further, banks can now give out loans in Indian rupees to non-residents from Bhutan, Nepal, and Sri Lanka for cross-border trade transactions.

Banking slowdown

“Overall, the policy has a strong tilt to support growth via other measures while noting that rate cuts will happen down the road,” Rangan added. “Furthermore, the Governor noting that underlying credit growth even if soft, overall flow of financial resources remains robust indicates that RBI is looking to support the flow of financial resources — banking or otherwise, which in itself is dovish.”

A slowdown in lending by banks has attracted attention over the past year or so. According to data released by the RBI on Tuesday, loans given by banks were up 10% year-on-year as on August 22, down from 13.6% a year ago. A paper by RBI economists, published last week, also noted that in 2024-25, the flow of credit from banks to the commercial sector had cooled, although that from non-banks “more than offset the moderation in bank credit”. It is no surprise then that the RBI is working hard to open up new lending avenues for banks and to push credit in existing areas by easing regulations.

Governor Malhotra, though, has defended the RBI’s moves, saying “nothing should be frozen in time” and as when “circumstances change, times change, requirements change”, regulations should also change.

“I don’t think you should see these measures as relaxations… Stability is foremost for us — whether it is price stability, whether it is financial stability… One episode of financial instability can take you many years behind,” the Governor said at the post-policy press conference on Wednesday. He added, however, that the central bank had to ensure that it is not “in any way impeding growth or limiting…the fulfillment of the genuine requirements of the various productive sectors of our economy”.

Inflation may be near record lows and GDP growth continues to be below aspirations. But the RBI clearly wants economic activity to be pushed not by temporarily lower interest rates but more structural factors.