RBI Holds Policy Steady Amid Global and Domestic Headwinds

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Context:

The RBI’s Monetary Policy Committee (MPC) decided to keep the policy rate unchanged and maintain a neutral stance, reflecting confidence in the Indian economy despite global uncertainties.

Policy Decision and Inflation Outlook

Neutral Policy Stance:The RBI left the policy rate unchanged, maintaining a neutral stance in line with expectations, indicating stability in monetary policy despite global turbulence.
Inflationary Trends:CPI inflation is expected to stay around 2% in June 2025 and remain between 4–5% through FY26, supported by easing food prices, especially vegetables.
Inflation Risks Remain:Vegetable inflation was high in recent months, but with improved supply, it is expected to moderate. However, the RBI remains cautious due to potential food price volatility.

Growth Projections and Domestic Factors

GDP Outlook for FY26:The RBI retained its GDP growth forecast at 6.5% for FY26, supported by strong agricultural activity, resilient rural demand, and favourable monsoon conditions.
Supportive Macroeconomic Conditions:Stable interest rates, lower inflation, and rising consumer demand contribute to economic resilience, with private consumption playing a key role.
Domestic Demand as Key Driver:India’s growth continues to be driven by domestic demand, with limited reliance on exports, as merchandise exports to the US form only 2% of India’s GDP.

Global Pressures and Policy Implications

Tariff and Trade Concerns:Recent tariff hikes by the US are unlikely to significantly impact India, but they add uncertainty to global trade and warrant close monitoring.
Private Sector Caution:Despite economic optimism, private investment remains cautious due to lingering global risks, even as corporate balance sheets show signs of strength.
Capital Flows and External Position:India’s foreign exchange reserves remain strong, covering nearly 11 months of imports, indicating resilience against external shocks.

Practice Question:

Discuss the implications of RBI’s neutral monetary policy stance in the context of global uncertainties and domestic inflation trends. How can India ensure macroeconomic stability while promoting growth? (250 words)

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