Festive bonanza effect? India’s Reserve Bank has done well by preserving its firepower for later
India’s central bank did not budge on its policy rate despite subdued inflation. But then, it also raised its GDP growth forecast. Overall, it has prudently sought to balance optimism with caution in an outlier year marked by fiscal relief and global uncertainty
America’s tariffs did not just upend India’s trade forecasts, they clouded the economic outlook with uncertainty, even though our economy’s growth impulses seem intact so far.
So, it is not a surprise that the Reserve Bank of India (RBI) this week chose not to join forces with the Centre’s fiscal stimulus by announcing a cut in its policy rate of interest. Instead, it kept its main lending rate unchanged at 5.5%. This, even as it lowered its 2025-26 forecast for retail inflation to 2.6% from 3.1%.
In ordinary circumstances, a further drop from its median 4% target would have led a shift in its attention to growth. But with GDP expansion beating expectations of late, it can afford to wait for clearer signals on where the economy is headed.
The central bank now sees it expanding 6.8% in 2025-26, up from its earlier forecast of 6.5%, but that seems more of a data adjustment and does not take away from the harm that US President Donald Trump’s tariff blitzkrieg against India is expected to cause later this year. This remains a concern, as reflected in RBI’s projection of a dip in GDP growth in the second half of this fiscal year.
In the context of RBI’s usual trade-off between growth and price stability, it found itself in an enviable position this time around. Inflation has been well in control and growth impulses are buzzy, both of which allow it to fine-tune monetary policy without worrying about upsetting the economic apple-cart either way.
With monsoon rainfall logging 8% above normal levels, food inflation can be expected to stay cool, even as stable crude oil prices should help keep broader inflationary pressures in check. Add to all this the government’s sharp GST rate cuts that took effect only last week. As retail prices adjust lower, we can expect a salutary effect on general price levels.
Meanwhile, reports indicate heavy footfalls at car showrooms and a wave of household durable purchases. This points to the Centre’s fiscal stimulus taking effect by stoking consumer demand. We can expect something of a cool-off once the main festive season is over, but overall demand signals appear favourable right now to economic expansion.
Given RBI’s mandate, which is to target inflation while keeping an eye on growth, RBI could not have been in a more fortuitous position. While it could have opted for a monetary stimulus to give the economy an extra tailwind, it chose to not disturb its current policy setting. Its easing of the cash reserve ratio for banks—the safety money they must keep with it—that was announced earlier began its first phase only last month, so its regulated lenders should have that much more to lend.
That said, Trump’s targeting of India has cast a shadow on our trade prospects that is hard to ignore. Global growth is expected to weaken and we can face a series of knock-on effects. This is reason enough for RBI to tread cautiously. By its next policy meeting in December, it would have more data at hand to go by in assessing how badly these US moves have affected our economy. If a case emerges for easier credit conditions, it could take action then.
For now, it should watch how its ‘front-loaded’ easing of policy earlier this year works its way through the economy. It’s true that its path is likely to get blurry from here on, but domestic growth drivers seem to be in play. In such circumstances, it’s usually best to preserve firepower for use when it’s actually needed.
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