A Policy of Patience
In a move signaling confidence in the domestic economy’s underlying strength, India’s central bank has opted for a course of stability, holding its key policy rate steady amidst a landscape of global uncertainty. The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) unanimously voted to keep the repo rate unchanged at 5.5 per cent, choosing to adopt a "wait-and-see" approach. This decision, coupled with a significantly more optimistic inflation forecast, suggests the RBI believes India’s economic resilience can weather external headwinds, including ongoing trade tensions and geopolitical instability.
Domestic Strength Amidst Global Turbulence
The MPC’s decision to maintain a neutral stance is rooted in a careful balancing act. RBI Governor Sanjay Malhotra acknowledged the challenging global environment but emphasized the robust performance of the domestic economy. The committee noted that private consumption, particularly driven by a revival in rural demand, and strong government capital expenditure continue to be powerful engines of growth.
This confidence is reflected in the RBI’s decision to maintain its forecast for real GDP growth for the current fiscal year (FY26) at a healthy 6.5 per cent. The central bank's outlook is bolstered by several positive domestic factors, including an above-normal southwest monsoon, healthy sowing of kharif crops, and comfortable levels in the country's reservoirs and food grain buffer stocks. While the RBI remains watchful of risks from global financial market volatility and trade disputes, its current assessment is that domestic fundamentals are strong enough to sustain the growth momentum.
A Brighter Inflation Picture
The best news from the policy meeting was the RBI's much-improved inflation forecast. The bank now expects inflation for the year to be just 3.1 per cent, a big drop from its earlier prediction of 3.7 per cent. This positive change gives the central bank more flexibility in its decisions.
This better outlook is thanks to a strong farm sector, which should help keep food prices stable. Inflation is already trending down, falling to a low of 2.1 per cent in June. It has now been below the RBI's 4 per cent target for five months in a row. With prices under control, the RBI can keep interest rates steady to support economic growth, instead of having to raise them. For now, this means loan rates tied to the repo rate will not change.
