MPC Moves Signal the Arrival of a Post-Cycle Policy Regime

The Monetary Policy Committee’s 25-basis-point cut in the repo rate to 5.25% sat comfortably on the back of sub-target disinflation and the space to keep supporting growth. That was the straightforward part.

The more consequential signal lay in the operating framework that may have been revealed. India may now be in a post-cycle setting in which rates, liquidity, and transmission need to be evaluated on separate tracks. A post-cycle regime is a phase in which the policy rate loses centrality, as inflation is anchored, structural frictions dominate growth, and liquidity operations become the primary channel through which policy is transmitted. 

Governor Sanjay Malhotra’s pairing of a neutral stance with accommodation through ₹1 trillion in bond purchases and a three-year $5 billion swap for December, with more such operations likely over the next two months, revealed this shift explicitly. His reminder that durable operations and short-term repos serve different purposes and may even move in opposite directions underscored that policy is decoupling from the neat coherence of the rate cycle.

This shift reflects the realities of recent transmission.

The call rate has often traded above the policy rate despite the central bank's unchanged stance. Banks have shown caution in unsecured markets, and deposit pricing has slowed pass-through. Fresh lending rates have declined by 69 basis points this year, against a 100-basis-point reduction in the repo rate (before the December policy). Outstanding lending rates have moved slowly. Transmission has become uneven and more dependent on institutional behaviour than on mechanical linkages.

When transmission becomes this uneven, monetary policy exits the traditional cycle. Policy can tighten credit swiftly, but reviving credit growth requires multiple enablers beyond the repo rate. The loss of predictable system-wide effects is precisely what defines a post-cycle setting.

Structural Frictions
These frictions explain the RBI’s growing reliance on liquidity tools. The objective is to align short-term rates with policy and ease bottlenecks that prevent lending rates from adjusting smoothly. Malhotra noted that OMOs are not intended to influence government bond yields but to provide durable liquidity. Repo and variable operations manage transient conditions. This dual approach reduces dependence on further meaningful shifts in the repo rate. And while the headline liquidity infusion via swaps and bond purchases appears significant, much of it may simply offset foreign exchange intervention. The operating priority, in a post-cycle configuration, leans more toward stabilisation than expansion.

Disinflation has strengthened this transition. The recent decline is broad-based, with nearly 80% of the consumer basket showing inflation below 4%. Underlying pressures are even weaker once the influence of precious metals is netted out.

With expectations anchored, monetary policy becomes less about restraining demand and more about navigating temporary price movements. This lowers the need for strong directional moves in the policy rate and increases the importance of operational instruments. Such conditions reveal that demand is no longer the binding constraint; the economy’s frictions are structural, and interest rates cannot materially alter them, a defining feature of a post-cycle regime.

The growth profile points in the same direction as domestic activity remains resilient, supported by tax rationalisation, investment, and improving rural demand. Yet structural features limit the impact of incremental rate changes.

Manufacturing capacity utilisation remains around 75%. Exports are uneven, and services continue to bear the burden of momentum. These features suggest that the economy’s constraints are not cyclical. Interest rate changes can help at the margin but cannot shift underlying capacity or productivity dynamics.

The external environment has also given the central bank more room. The current account deficit has narrowed. Services exports and remittances remain strong. Reserves provide more than 11 months of import cover. This resilience allows India to set its own pace rather than follow global cycles. Divergence in monetary trajectories across major economies reinforces this flexibility, another characteristic of a post-cycle setting.

Taken together, the MPC’s decisions and the Governor’s commentary were not signals of a conventional easing cycle. They were steps toward defining a framework in which the repo rate is only one part of the policy toolkit. Liquidity operations, communication, and transmission management now play larger roles.

Stance, liquidity, and rates must be read as distinct instruments rather than a single directional message.

For markets, the implication is direct. Classical cycle heuristics are becoming less valuable. Policy will operate through a more complex set of levers, calibrated to structural conditions rather than short-lived fluctuations. The December review signalled that India’s monetary regime has shifted; the lens through which it is interpreted must shift with it.

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