Context:

• This article pertains to the Reserve Bank of India’s (RBI) latest Monetary Policy Committee (MPC) meeting and its assessment of inflation trends, GDP growth prospects, external trade risks, and future policy outlook.

RBI’s Monetary Policy Stand:

• RBI kept the repo rate unchanged and maintained a neutral stance.
• The central bank has already reduced the policy rate by 100 basis points (bps) since February 2025.
• With CPI inflation projected to rise beyond 4% in 2026, further rate cuts are unlikely in this cycle.

Inflation Outlook:

• Current trends:
  • Consumer Price Index (CPI) inflation dropped sharply to approximately 2% in June 2025; projected at 2.5% for the next two quarters.
  • FY26 CPI inflation projection lowered to 3.1%, aided by a statistical base effect and vegetable price deflation.
• Vegetable price volatility:
  • Vegetable inflation that was very high in 2024 (averaging 27%), has recorded sharp deflation, averaging -15% in the last three months.
  • Vegetable price sub-index (6% weight in CPI) remains highly volatile.
  • If we exclude vegetable prices, CPI inflation was in the range of 3-4% for the entire FY25 and remains in the same range in Q1 FY26.
• Future projections:
  • Due to reversal of base effect, CPI inflation is expected to breach 4% in Q4 FY26.
  • FY27 CPI inflation could average above 4.5%, in line with RBI’s estimates.

Growth Projections and Domestic Factors:

• GDP outlook:
  • RBI retained FY26 GDP growth projection at 6.5%, reflecting growth optimism.
  • Supportive factors:
    • Interest rate cuts
    • Strong agricultural output
    • Benign inflationary environment
    • Good monsoon and lower income tax burden
• Consumption and employment concerns:
• Urban consumption remains weak due to low income growth and hiring slowdown, particularly in the IT sector.
• Top 5 IT firms show stagnant employment, and employee cost growth across 670 companies dropped from 14% (FY19–FY24) to 5% (FY25).
• Investment trends:
  • Public capital expenditure (capex) surged by 52% in Q1 FY26.
  • However, private sector investment remains cautious amid economic uncertainties.

External Sector and Trade Dynamics:

• External risks:
  • US reciprocal tariffs pose risk to India’s external sector.
  • Merchandise exports may contract in FY26, though services exports stay resilient.
• Current account and forex reserves:
  • India’s current account deficit to be manageable at 0.9% of GDP in FY26.
  • With forex reserves at a comfortable level of $689 billion covering 11 months of merchandise imports, India’s external sector is broadly insulated, although it needs to remain cautious.

Policy Outlook - Wait-and-Watch Approach:

• With real interest rates low (approximately 1%) and liquidity ample, the RBI will likely pause further rate cuts.
• Only a significant downturn in growth due to external shocks may prompt further easing.

Conclusion:

• The RBI’s cautious yet optimistic approach reflects a nuanced understanding of evolving macroeconomic trends.
• Sustained domestic demand, strategic policy manoeuvring, and vigilance on inflation and external risks will be key to maintaining economic stability in FY26 and beyond.