Indian Economy: On hold, not an all-clear

Amid the continuing conflict in West Asia and weather-related uncertainties, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept interest rates on hold and maintained its neutral stance.

The MPC’s decision comes at a time when the balance between growth and inflation is becoming increasingly delicate. Headline consumer inflation rose to 4.5% in July. That said, core inflation remains relatively benign and does not yet point to a broad-based generalization of price pressures. This gave the RBI room to lower its headline inflation forecast for the current fiscal by 10 basis points to 5.0%.

Inflation risks, however, warrant close monitoring, as reflected in the MPC minutes. With the conflict in West Asia showing no signs of resolution, crude oil prices are likely to remain elevated.

Weather-related risks also persist amid prevailing El Nino conditions. Cumulative rainfall was 13% below the long-period average as of August 18.

Interestingly, the RBI raised its growth forecast for the current fiscal to 6.7% from 6.6%, citing better-than-expected performance across a range of high-frequency indicators.

The theme article examines India’s growth dynamics over the past few years, as well as developments in the opening months of the current fiscal.

The exceptional gross domestic product (GDP) growth of 7.7% in the last fiscal was aided by favorable external conditions, including lower oil prices and normal monsoons. In addition, accommodative monetary policy and fiscal support through direct and indirect tax cuts, along with spending via direct benefit transfers, helped underpin growth.

Healthy industrial activity, robust consumption, and sustained government investment were the key drivers of growth in the first quarter of the current fiscal. Particularly noteworthy was the strong performance of the automobile sector. Read on for more details.

As the economy moves deeper into fiscal 2026-27, growth is projected to moderate to 6.6% from 7.7% last fiscal, while inflation is expected to rise to 5.1% from 2.0%. This less favorable growth-inflation mix reflects a weakening external environment, including disruptions stemming from the West Asia conflict, unresolved tariff issues with the United States (US), and weather-related uncertainties.

In short, India’s economy remains resilient, but the road ahead is likely to be less forgiving than the one traversed in recent years. The challenge now is to sustain growth amid a more complex and uncertain macroeconomic landscape.