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Rooting for Growth
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Context
The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points, from 6.25% to 6%, marking the second consecutive rate cut. The Monetary Policy Committee (MPC) has shifted its stance from neutral to accommodative, signalling a focus on reviving growth amid global uncertainties, including the ongoing US-led trade war.
ECONOMIC RATIONALE BEHIND RATE CUT
- Global Headwinds and Trade War: With US tariffs disrupting global trade, the RBI has lowered India’s FY26 GDP growth forecast to 6.5% from 6.7%, indicating external challenges and deceleration risks.
- Inflation Under Control: The inflation forecast for 2025-26 is reduced to 4% (from 4.2%), with H1 expected at 75% and H2 at 4.1%, giving the RBI space for monetary easing without stoking price pressures.
- Export Exposure Lower than Peers: Although India’s exports contribute 21% to GDP, lower than Thailand (65%) and Vietnam (87%), the indirect effects of global slowdown and capital outflows are still concerning.
DOMESTIC IMPLICATIONS OF THE RATE CUT
- Boost to Consumption and Credit: Lower repo rates can reduce EMIs on housing and auto loans, potentially reviving consumer demand and facilitating credit growth.
- Weak Private Investment Outlook: Despite earlier signs of recovery, private sector investment remains tepid, as global instability and weak domestic consumption dent investor confidence.
- Impact on Savers: Falling deposit rates may erode real returns for fixed-income savers, possibly altering household investment preferences towards riskier assets.
LIMITATIONS & WAY FORWARD
- Limited Transmission by Banks: Monetary policy effectiveness is constrained by inefficient rate transmission to borrowers, weakening the intended stimulus impact.
- Need for Fiscal and Structural Support: Rate cuts cannot substitute structural reforms; coordinated fiscal measures and policy clarity are crucial to revitalising investment and demand.
- Vigilance Against Macroeconomic Risks: The RBI must monitor currency volatility and inflation, as prolonged easing can increase external sector vulnerability and price instability.
Practice Question
Q. Discuss the implications of the RBI’s accommodative monetary policy stance in the current global and domestic economic context. What limitations does monetary policy face in reviving economic growth in India?
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