Vishleshan for Regulatory Exams: Check Daily News Analysis 16th June 2025 

Newspapers play a big role in shaping how we understand important social, political, and economic topics. For aspirants of competitive exams like RBI Grade B, SEBI Grade A, and NABARD Grade A, staying updated with financial news is a must. But finding short, reliable, and insightful analysis isn’t always easy. That’s where Vishleshan for Regulatory Exams comes in—offering deep, exam-focused breakdowns of top financial stories from papers like Mint and Business Standard. Today, we’ll cover the major highlights and smart insights from June 16, 2025, focusing on RBI’s bold rate cut, its implications for inflation, monetary-fiscal dynamics, and how RBI’s record surplus transfer is reshaping India’s fiscal outlook.

Monetary Policy’s Effectiveness: A Balance Talk And Action

Context: The latest monetary policy has also gone for a 50-basis-point rate cut, double the anticipated reduction. As the dust is settling down on the June monetary policy, there is intense debate among economists and central bank watchers on the no-frills, no-nonsense, bold policy based on available data.

Source: Business Standard

The recent monetary policy decision by the Reserve Bank of India (RBI) to implement a larger-than-anticipated 50 basis points (bps) rate cut, coupled with a reduction in the Cash Reserve Ratio (CRR) and a shift in stance to “neutral,” has ignited a significant debate among economists. This move, reminiscent of a bold rate cut by former RBI Governor Raghuram Rajan a decade ago, highlights the ongoing tension between a central bank’s need for decisive action and its communication strategy, especially amidst global uncertainties.

Monetary Policy vs. Fiscal Policy

Monetary Policy and Fiscal Policy are the two primary tools governments use to influence a nation’s economy, but they differ fundamentally in their actors, instruments, and objectives.

Monetary Policy:

• What: Refers to actions undertaken by a central bank (like the RBI) to control money supply and credit conditions to stimulate or slow down economic activity.
• Who: Implemented by the central bank.
• Instruments: Primarily involves managing interest rates (e.g., repo rate, reverse repo rate), liquidity (e.g., Cash Reserve Ratio – CRR, Statutory Liquidity Ratio – SLR, Open Market Operations – OMOs), and credit controls.
• Objectives: Aims to achieve macroeconomic goals such as price stability (controlling inflation), fostering economic growth, maintaining full employment, and ensuring exchange rate stability.
• Example: When the RBI cuts the repo rate, it aims to make borrowing cheaper for banks, encouraging lending and boosting investment and consumption.

Fiscal Policy:

• What: Refers to the government’s decisions regarding taxation and public spending to influence aggregate demand and supply in the economy.
• Who: Implemented by the government (Ministry of Finance in India).
• Instruments: Involves adjusting government spending (e.g., infrastructure projects, subsidies, welfare programs) and tax rates (e.g., income tax, corporate tax, GST).
• Objectives: Aims to achieve macroeconomic goals such as economic growth, employment generation, income redistribution, and managing public debt.
• Example: When the government increases spending on infrastructure, it directly boosts demand and creates jobs. When it cuts taxes, it leaves more disposable income with people, encouraging consumption and investment.

Key Difference: The fundamental distinction lies in who controls them. Monetary policy is managed by an independent central bank, while fiscal policy is managed by the elected government. They often work in tandem but can sometimes have conflicting objectives or independent trajectories. This BS article hints at this potential interplay when it asks: “Should we then infer that the ball is now in the government’s court for giving growth an impetus, if the RBI actions don’t bear fruit?”

Framework for Monetary Policy Committee (MPC)

The Monetary Policy Committee (MPC) is a statutory body constituted under the Reserve Bank of India Act, 1934. Its establishment in 2016 marked a significant reform in India’s monetary policy framework, aiming to enhance transparency, accountability, and efficiency in decision-making.

• Section 45ZB of the RBI Act, 1934: This section empowers the Central Government to constitute a six-member Monetary Policy Committee.
• Mandate: The primary mandate of the MPC is to determine the policy interest rates (like the repo rate) required to achieve the inflation target set by the Government of India. The current inflation target, as per an agreement between the Government and the RBI, is 4% Consumer Price Index (CPI) inflation with a tolerance band of +/- 2% (i.e., 2% to 6%).
• Composition: The MPC comprises six members:
  • Three ex-officio members from the RBI: The Governor of the Reserve Bank of India (who is the ex-officio Chairperson), the Deputy Governor in charge of monetary policy, and one officer of the Reserve Bank to be nominated by the Central Board.
  • Three external members: These are appointed by the Central Government on the recommendation of a Search-cum-Selection Committee. They are experts in economics, banking, finance, or monetary policy. Their term is four years, and they are not eligible for re-appointment.
• Decision-Making: Decisions are taken by majority vote. In case of a tie, the Governor has a second or casting vote.
• Accountability: If the RBI fails to meet the inflation target for three consecutive quarters, it is required to submit a report to the Government explaining the reasons for failure and proposed remedial actions.

How a Wrongly Judged Monetary Policy May Harm the Economy

A monetary policy that is “wrongly judged” or ill-timed can have severe detrimental effects on an economy:

• If Rates are Too High (Tight Monetary Policy when not needed):
  • Stifles Growth: High interest rates make borrowing expensive for businesses, discouraging investment and expansion. This can lead to slower economic growth, reduced job creation, and even a recession.
  • Deflationary Pressures: If persistent, excessively tight policy can push inflation too low, leading to deflation, a dangerous spiral where falling prices discourage consumption and investment.
  • Currency Overvaluation: High rates can attract foreign capital, causing the domestic currency to appreciate, making exports less competitive and imports cheaper, hurting domestic industries.
• If Rates are Too Low (Loose Monetary Policy when not needed):
  • Inflation: Excessively low interest rates and abundant liquidity can lead to “too much money chasing too few goods,” driving up prices and causing inflation. This erodes purchasing power, particularly for fixed-income earners and the poor.
  • Asset Bubbles: Cheap money can inflate asset prices (e.g., real estate, stocks) beyond their fundamental value, leading to unsustainable asset bubbles that can burst and trigger financial crises.
  • Misallocation of Capital: Very low rates can lead to unproductive investments (“zombie firms”) as capital is not efficiently allocated, reducing overall economic productivity.
  • Currency Depreciation: Sustained low rates can lead to capital outflows, causing the domestic currency to depreciate, making imports expensive and fueling imported inflation. The article mentions the “sudden spike in crude oil prices, after Israel launched a sweeping military operation on Iranian nuclear and military sites, may have an adverse impact on CPI-based inflation. Who knows?”. This highlights a real-world risk to a loose policy stance.

Decoding the Whole Issue: Analysis of RBI’s Current Stance and Communication

The article dissects the RBI’s recent monetary policy actions and, crucially, its communication strategy, drawing comparisons to past governors and global central banking practices.

1. The Boldness of the June Policy:

• Surprise 50 bps Cut: The latest monetary policy (June 2025) mirrored a September 2015 move by cutting the repo rate by 50 basis points, “twice the extent that was widely anticipated”. This brings the repo rate to 5.5%.
• Beyond Rate Cut: The RBI “hasn’t stopped there.” It also included a cut in banks’ cash reserve ratio (CRR) and a change in the monetary policy stance from “accommodative” to “neutral”.
• Reason for Boldness: As then Governor Raghuram Rajan justified his 2015 50 bps cut, the current RBI likely aims to ensure “sustainable and growth go together”. The current Governor Sanjay Malhotra’s actions are based on “what he sees and feels must be done now”.

2. Debate on the “Right Approach” Amidst Uncertainty:

• Policy Approach Dichotomy: The article highlights an “intense debate” on whether this “no-frills, no-nonsense, bold policy based on available data” is the “right approach”. It contrasts two central banking styles:
  • “Feeling the pebbles” (Cautious): Taking “cautious small steps as they move forward, as every bit is not known”.
  • “Acting on current moment” (Bold): Formulating policy based on “what they see and feel at the current moment.” Malhotra is characterized as the latter.
• Uncertainties: The article points to “too many uncertainties around”, including the sudden spike in crude oil prices after geopolitical events in the Middle East, which “may have an adverse impact on CPI-based inflation”.
• Inflation Data vs. Stance Change: Despite the CPI-based inflation easing to 2.8% in May (lowest in 75 months) from 3.2% in April, the article questions if the “change in the stance in just two months (it was made “accommodative” in April) in sync with the incoming inflation data?”. This implies a potential disconnect or rapid shift in assessment.

3. The Crucial Role of Central Bank Communication:

• Credibility is Currency: “Central bankers should walk the talk as credibility is their currency.” If they don’t, “markets stop believing them and the monetary policy loses its bite”.
• “98% Talk and 2% Action”: Former Fed Chair Ben Bernanke’s quote, “Monetary policy is 98 per cent talk and 2 per cent action,” emphasizes the power of forward guidance (talking about future actions) in shaping market expectations.
• Malhotra’s Communication Style: Malhotra has been candid, stating that “monetary policy is left with very limited space to support growth” after the recent actions. This suggests the “ball is now in the government’s court for giving growth an impetus”.
• The Balance: The article concludes that “what works better? Probably a balance between talk and action”. A central banker who only “does” without preparing the market risks “shock and volatility,” while one who only “talks” loses “credibility”. Ideally, central bankers should “prepare the market, signal intentions transparently, and follow through — explain why they did what they did. Malhotra has done that”.

4. Policy Transmission and Lag Effects:

• Short-End Transmission: The article notes that the “one-year treasury bill yield dropped by close to 100 bps” between February and June, and the “overnight rate is moving southwards, in sync with the policy rate”. This indicates transmission is happening at the shorter end of the yield curve.
• Long-End Resistance: However, the “10-year bond yield has hardened by about 10 bps” after the larger rate cut, and transmission is “not across the board”. This resistance at the longer end implies that the full benefit of lower policy rates may not be reaching long-term loans (e.g., mortgages, infrastructure financing) as effectively.
• Lag Effect: The article concludes with the common refrain that “there is always a leg effect between policy action and its impact. We need to wait and watch”. This acknowledges that the full effects of the rate cut will take time to manifest across the economy.

In essence, the RBI under Governor Malhotra is pursuing a bold, action-oriented monetary policy, leveraging room created by cooling inflation to stimulate growth. While the domestic inflation outlook appears favourable for now, global uncertainties, the unevenness of policy transmission, and the balance between central bank action and communication remain critical points of discussion and require a nimble-footed approach as “economies evolve rapidly”.

Fiscal Deficit May Stay Below Estimate

Context: The RBI alone will transfer a record ₹2.7 trillion in surplus to the Centre for 2025-26, which is even higher than the latest budget’s estimates of ₹2.56 trillion in dividends

Source: Mint

India’s central government is demonstrating strong commitment to fiscal discipline, aiming to narrow its fiscal deficit to below target in the upcoming fiscal year. This fiscal prudence is significantly bolstered by higher-than-anticipated dividend transfers from state-run entities, particularly the Reserve Bank of India (RBI) and Public Sector Undertakings (PSUs). Such a reduction in the fiscal gap provides crucial fiscal space, allowing the government to sustain capital spending and support economic growth.

What is Fiscal Deficit?

Fiscal Deficit represents the difference between the government’s total expenditure and its total receipts (excluding borrowings). In simpler terms, it’s the amount of money the government needs to borrow to meet its spending obligations when its revenue falls short.

Calculation: Fiscal Deficit = Total Government Expenditure – (Total Revenue Receipts + Non-Debt Capital Receipts)

• Total Government Expenditure: Includes both revenue expenditure (e.g., salaries, subsidies, interest payments) and capital expenditure (e.g., infrastructure development, asset creation).
• Total Revenue Receipts: Primarily tax revenues (income tax, corporate tax, GST, customs duties) and non-tax revenues (e.g., dividends from PSUs, interest receipts).
• Non-Debt Capital Receipts: Primarily includes receipts from the disinvestment of public sector undertakings (PSUs).
• Borrowings: The fiscal deficit is essentially the total borrowing requirement of the government.

Impact of Higher and Lower Fiscal Deficit to GDP Ratios

The fiscal deficit is often expressed as a percentage of Gross Domestic Product (GDP), providing a measure of the deficit relative to the size of the economy.

• Impact of Higher Fiscal Deficit to GDP Ratio:
  • Increased Debt and Debt Servicing: A higher deficit means the government borrows more, leading to an increase in public debt. Consequently, a larger portion of government revenue is used to service this debt (pay interest), “which strains the economy”. This reduces funds available for development and social welfare.
  • Risk of Currency Devaluation: Persistent high deficits can lead to concerns among foreign investors about the government’s ability to manage its finances, potentially causing “risks devaluing the currency” as foreign capital outflows increase.
  • Crowding Out Private Investment: When the government borrows heavily from the market, it can reduce the availability of funds for the private sector and push up interest rates, thereby “impacting private investments” (known as the crowding-out effect).
  • Inflationary Pressure: Excessive government spending, especially if funded by printing more money (monetization of deficit), can lead to too much money chasing too few goods, resulting in inflation.
  • Erosion of Investor Confidence: A perception of fiscal profligacy can erode confidence among domestic and international investors, leading to lower investment and slower economic growth.

• Impact of Lower Fiscal Deficit to GDP Ratio:
  • Fiscal Space for Capital Spending: A lower deficit implies sound financial health, providing the government with “added fiscal space to maintain capital spending”. Capital spending is crucial for infrastructure development, which has a multiplier effect on economic growth.
  • Reduced Debt Burden: Lower borrowing reduces public debt and debt servicing costs, freeing up resources for productive investments and social programs.
  • Currency Stability: Fiscal prudence instills confidence in the economy, supporting currency stability and attracting foreign investment.
  • Favourable Investment Climate: Lower government borrowing ensures more funds are available for the private sector at potentially lower interest rates, encouraging private investments.
  • Credibility and Resilience: A lower fiscal deficit signals commitment to “fiscal discipline”, enhancing the government’s credibility and making the economy more resilient to external shocks.

Provisions for Fiscal Deficit as per the FRBM Act, 2003

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, was enacted in India to institutionalize fiscal discipline, reduce the fiscal deficit, and manage public debt.

• Objective: The primary objective of the FRBM Act was to ensure inter-generational equity in fiscal management and long-term macroeconomic stability by setting targets for government deficits.
• Initial Targets: The original Act mandated the central government to reduce the fiscal deficit to 3% of GDP by 2008-09 and eliminate the revenue deficit.
• Amendments and Review Committees: The targets have been revised several times due to economic realities and unforeseen events (like the 2008 global financial crisis or the COVID-19 pandemic). Various review committees (e.g., NK Singh Committee) have provided recommendations on the fiscal roadmap.
• Fiscal Consolidation Roadmap (2021-22): The Centre adopted a fiscal consolidation roadmap in 2021-22 to reduce the fiscal deficit to below 4.5% of GDP by 2025-26. This reflects the current commitment within the FRBM framework.

How RBI’s Surplus Transfer Has Helped the Government Tackle Fiscal Deficit

The Reserve Bank of India (RBI) transfers its surplus profits (dividends) to the government annually. This transfer significantly aids the government in managing its fiscal deficit.

• Record Transfers: The article highlights “highest-ever dividend payout” by the RBI, which will transfer ₹2.7 trillion in surplus to the Centre for 2025-26. This amount is “even higher than the latest budget’s estimates of ₹2.56 trillion in dividends from the central bank and state-run banks combined”.
• Drivers of High Transfer: The “unprecedented transfer was driven by robust dollar sales, foreign exchange gains, and a steady rise in interest income”.
• Impact on Fiscal Math: This large transfer “will play a pivotal role in shaping the fiscal math for 2025-26”.
• Previous Year’s Contribution: For 2024-25, the Centre expected to earn dividends of ₹2.34 trillion, including the RBI’s ₹2.1 trillion.
• Augmenting Non-Tax Revenue: These transfers directly boost the government’s non-tax revenue receipts, reducing its reliance on borrowings and thus helping to narrow the fiscal deficit.

Decoding the Whole Issue: Analysis of India’s Fiscal Position

The article presents an optimistic outlook on India’s fiscal position for 2025-26, driven by stronger-than-expected revenue flows and a commitment to fiscal consolidation.

1. Better-than-Target Fiscal Deficit:

• The Centre is “likely to narrow its fiscal deficit to 4.2-4.3% of gross domestic product (GDP) in 2025-26,” which is “better than its target of 4.4%”.
• This positive outcome is primarily “driven by higher-than-anticipated dividends from state-run enterprises, banks and the Reserve Bank of India (RBI)”.
• This projected outperformance follows a similar trend in 2024-25, where the fiscal deficit stood at 4.8%, implying it also came in lower than initial estimates.

2. Bolstered by PSU and Bank Dividends:

• RBI’s Record Transfer: The RBI’s ₹2.7 trillion surplus transfer for 2025-26 is the “highest-ever dividend payout” and exceeds the budget’s combined estimate from RBI and state-run banks. This unprecedented scale is due to “robust dollar sales, foreign exchange gains, and a steady rise in interest income”.
• PSU Bank Dividends: The Union government expects to collect ₹20,000-25,000 crore in dividends from PSU banks for 2024-25, buoyed by a record ₹1.78 trillion in combined net profit by all 12 public sector banks. These banks paid ₹18,000 crore in 2023-24 and ₹13,804 crore in 2022-23.
• Public Sector Undertakings (PSUs) Dividends: Dividend payments from PSUs are expected to top ₹80,000 crore for 2025-26. Leading contributors include NTPC Ltd, Power Grid Corp. of India Ltd, Hindustan Zinc Ltd, Nuclear Power Corp. of India Ltd, Coal India Ltd, National Aluminium Co. Ltd (Nalco), and Oil and Natural Gas Corp. Ltd.
• In 2024-25, CPSE dividend receipts surged to ₹74,016.68 crore, above the revised estimate of ₹55,000 crore, despite global uncertainties.

3. Fiscal Discipline and Growth Imperatives:

• The government’s strategy reflects a “commitment to fiscal discipline even as it balances growth imperatives”.
• The “narrow gap in revenue and expenditure will provide the central government with added fiscal space to maintain capital spending to keep the growth engine humming”. This implies that the government can continue investing in crucial infrastructure projects that drive long-term economic growth without increasing its borrowing.
• The “broader strategy to optimize public sector balance sheets and unlock value for the exchequer” is evident in the robust dividend flows.

In essence, India’s fiscal health is set to improve significantly in 2025-26, primarily due to unexpected bonanzas from the RBI and profitable public sector entities. This strong fiscal performance is not just about meeting targets but crucially about creating essential fiscal space to fund growth-enhancing capital expenditure, while managing debt and maintaining economic stability.

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