What it means for EMIs, markets and India’s economy now

When a central bank cuts interest rates, the world usually assumes one of two conditions. Either the growth is faltering or inflation is dangerously high. India today meets neither condition. Growth is roaring. Inflation is (comfortably) low. Consumption remains resilient. Services continue to expand. The financial system is flush with liquidity.

Yet, in a move that surprised even seasoned macro watchers, the RBI earlier this month cut the repo rate by 25 basis points to 5.25%.

SBI, in its assessment, called the move “exceptional.” That description is accurate—but incomplete. This rate cut is not merely an exception. It is a signal! A signal that despite headline growth numbers, the RBI is not fully satisfied with the quality and composition of India’s growth.

This is less about rescuing the economy and more about rebalancing it.

A proactive Central bank, Not a reactive one

The standout message from the RBI’s Monetary Policy Committee (MPC) is confidence, tempered with concern. Confidence that inflation is not just subdued but structurally tamed. Confidence that growth momentum is durable. Confidence that India’s macro buffers such as forex reserves, fiscal consolidation, banking-sector health are strong enough to support an aggressive policy nudge.

RBI Governor Sanjay Malhotra described the current phase as a “rare Goldilocks period,” noting, “Inflation at a benign 2.2 per cent and growth at 8.0 per cent in H1:2025–26 present a rare Goldilocks period.”

But beneath this optimism lies a quieter acknowledgement that growth today is being disproportionately driven by consumption and services and not by manufacturing-led private investment.

Government capex especially in infrastructure has carried much of the load. Private capital expenditure, however, remains hesitant. New greenfield projects are limited. Manufacturing investments are selective. Risk appetite among private promoters remains cautious.

This rate cut is therefore not defensive. It is directional. The RBI is saying in a way that growth must broaden and private investment must step up.

Why the RBI is pushing private capex

Lowering interest rates at this stage is meant to act as a catalyst. Cheaper money improves project viability, lowers hurdle rates and reduces the cost of carry for long-gestation investments.

MSMEs and small manufacturers will find working capital more affordable. Housing demand should strengthen further. Corporate borrowing costs will ease. Bond markets may deepen as debt financing becomes more attractive. Over time, this could nudge boardrooms into reviving shelved projects.

In normal downturns, rate cuts merely cushion demand. In today’s environment, which is defined by strong growth, low inflation and stable macros, they are meant to unlock a stalled investment cycle.

SBI captured this sentiment succinctly, stating that the move “sets the tone for a more confident investment cycle under a supportive monetary-policy environment.”

But rate cuts are not a silver bullet

Here lies the most critical caveat!

While the RBI can make capital cheaper, it cannot make capital fearless. Private investment in India today is constrained not just by financing costs but by regulatory uncertainty and legal risk. On-the-ground ease of doing business, many investors argue, has deteriorated rather than improved. Land acquisition remains complex. Regulatory approvals are slow and often opaque. Compliance burdens are high and overlapping. The bankruptcy framework while well-intentioned has struggled to deliver predictable and timely recoveries. 

Labour reforms: A step in the right direction, execution is key

It is important to recognise that not all reform signals are negative. The introduction of the Labour Codes marks one of the most consequential structural changes in India’s business environment in decades.

Despite inevitable transitional challenges, the Labour Codes represent a progressive and transformative shift. The new regulations are aimed at simplifying compliance, strengthening worker welfare, fostering inclusivity and aligning India’s labour framework with global standards. If implemented effectively, they have the potential to reduce friction for employers while improving job security and formalisation for workers.

However, their success will hinge on seamless implementation, harmonised rules across states and a shared commitment between policymakers and industry. Without clarity and consistency on the ground, even well-designed reforms risk diluting investor confidence.

In that sense, labour reform illustrates both India’s opportunity and its challenge. There is a strong intent but execution will determine outcomes.

Managing the risk of froth

Exceptional policy moves also carry risks. Loose money in a high-growth environment can inflate asset prices faster than productive capacity.

Luxury housing, mid-cap and small- cap equities, and certain NBFC-led credit segments require vigilance. If liquidity flows disproportionately into speculative assets rather than factories and infrastructure, inflationary pressures could resurface. Rupee volatility may intensify as global capital responds to narrowing interest-rate differentials.

The RBI appears aware of these risks. Liquidity injections have been calibrated and the communication remains cautious. As the Governor noted, policy rates are expected to remain low. However, prudence remains non-negotiable.

If excesses build, the central bank will not hesitate to reverse course.

A structural bet on India’s next growth phase

Beyond the immediate cycle, the rate cut reflects a deeper structural bet. Corporate balance sheets are healing after years of deleveraging. Banks are well-capitalised. Global supply chains are diversifying. Production-linked incentives are beginning to show results. India stands at the threshold of a potential once-in-a-generation investment opportunity.

A 25-basis-point cut, in this context, is a modest price to pay to catalyse a multi-year capex cycle. Now institutional and regulatory confidence must keep pace.

As SBI rightly observes, the RBI has played its part. Now the responsibility shifts to markets, regulators, policymakers and corporates.

A defining moment—with conditions

India has moved from a monetary stance of protection to one of promotion. From reactive easing to strategic easing. From managing volatility to shaping economic direction. This is a defining moment for Indian monetary policy.But the rate cut is only the opening move. Its success will depend on whether India pairs monetary courage with regulatory clarity and institutional reform. If it does, this could ignite the next decade of expansion. If it does not, the window may close as quietly as it opened.

The RBI has taken the leap. Whether India truly takes off will depend on how boldly—and wisely it reforms what lies beyond interest rates.

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