RBI takes a ‘growth stand’ as Trump's tariffs challenge global economy

Reserve Bank of India

With its second 25 basis points repo rate cut this year - that takes the current Repo Rate to 6 per cent - the Reserve Bank of India (RBI) has clearly taken a stand to support economic growth.

The stance changed to ‘accommodative’ signals an easy monetary policy geared to stimulate economic activity, supported by a ‘decisive improvement in inflation outlook’, as the Governor put it, and its alignment to RBI’s target of 4% inflation.

Overall, the RBI suggests sustaining a 6 per cent plus ‘non-inflationary GDP growth’ is the primary goal while keeping a close watch on how the global economic uncertainties pan out for India over time, with the hope that it will not impact us much.

With inflation expected to be benign, the RBI Governor seemed quite clear in his outlook – of continuing to support growth, especially at a time when there is high global volatility due to the tariff war that may dent the overall economic growth outlook. The RBI’s hand is also forced by the fact that India's GDP for Q4FY25 is expected to come a tad lower at 6.3 per cent and the overall growth for FY26 is being revised downward to 6.5 per cent from 6.7 per cent (in Feb policy). In light of these developments, the Monetary Policy Committee (MPC) this time has unanimously chosen to cut rates, to give a much-needed fillip to India's economy.

The Governor's confidence stems from the fact that inflation seems to be durably aligning to the comfort zone of 4 per cent set by the central bank over the next 12 months – a scenario that may endure in the next several quarters unless there is a spike in the food inflation. In the last few months, the headline inflation had moderated due to a sharp correction in the food inflation which may persist thanks to an improving agriculture produce outlook and sufficient reservoir levels. The crude has already fallen significantly, helping the inflation levels.

Further, the improving prospects of the agriculture sector will certainly lift the rural incomes and demand, leading to higher capacity utilisation and more investment by corporates. With the infrastructure spending by the Government gathering pace, the economy must recover the lost ground mid-FY26. Amid this outlook, merchandise exports are likely to be weighed down by global uncertainties, but services exports may remain resilient. Overall, the calculation is that global outlook challenges may not influence the domestic inflation significantly.

The decision to cut rates is also supported by the current real interest rate scenario. With the repo rate at 6 per cent (post the April rate cut) and inflation expected to be ~4%, the real interest rate is close to 2 per cent – providing sufficient room for the RBI to cut rates further. This is a positive sign for the economy, as it indicates that the RBI is committed to sustaining the GDP growth while maintaining a comfortable inflation zone.

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The change in stance to ‘accommodative’ is also a significant step that demonstrates the RBI’s intention to maintain an easy monetary policy geared to stimulate growth and economic activity. This shift in stance is expected to have a positive impact on the economy, as it will provide a boost to growth and help to mitigate the downside risks.

Coming to systemic liquidity, the RBI has made it clear that liquidity is not a policy tool, but an operational tool to ensure policy transmission. The recent announcements as well as the actions taken by the central bank show a proactive approach to managing liquidity, ensuring that the policy transmission takes place at the ground level. The assurance of adequate liquidity will have a positive impact on the economy, ensuring that the benefits of the monetary policy decisions are transmitted to the real economy, faster and more efficiently.

Looking at the present global challenges, with recent trade tariffs leading to a potential global slowdown, the GDP growth print of 6.5 per cent could be a tad ambitious.  Also, we are witnessing divergent views from central banks, especially the US Fed about their inflation, GDP growth and interest rate revisions. Hence, the immediate priority for RBI will be to ensure that the repo rate cuts are quickly transmitted to the economy to support consumption and growth.

As Benjamin Franklin once said,” without continual growth and progress, such words as improvement, achievement, and success have no meaning.” India needs a long-term, balanced growth-inflation trajectory that supports a stable economic expansion with financial stability. For the moment, the RBI has, enough tools and room, at its disposal to take us there.

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