The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) struck an expectedly steady note at its latest review, retaining both the repo rate and policy stance.
India’s growth-inflation mix has improved marginally compared with the June forecast, with growth now projected to be 10 basis points higher and inflation 10 basis points lower.
The MPC’s decision comes at a time when the balance between growth and inflation is becoming increasingly delicate. Headline consumer inflation rose above 4% in June, crossing the midpoint of the RBI’s tolerance band, driven by higher crude oil and commodity prices following the resurgence of conflict in West Asia.
Yet, core inflation remains relatively benign and does not point to a broad-based generalisation of price pressures. It was stable at 3.9% in June and stood at a modest 2.5% excluding precious metals. This suggests the recent increase in headline inflation continues to be driven more by supply-side factors than by demand-led pressures.
That said, inflation risks cannot be ignored. Our base case assumes crude oil averages $82-87 per barrel this fiscal, significantly higher than the $70 average last fiscal. A prolonged conflict in West Asia would push prices materially higher.
Weather-related risks also warrant close monitoring. Although rainfall exceeded the India Meteorological Department’s forecast in July, moderate El Niño conditions continue to prevail in the equatorial Pacific, leaving open the possibility of a dry spell later in the season.
A weaker rupee presents another source of inflationary pressure. Recent RBI measures aimed at attracting foreign capital inflows appear to be yielding results, with cumulative inflows under these schemes crossing $40 billion by end-July. This should help stabilise the currency and may support some appreciation in the second half of this fiscal.
On the growth front, high-frequency indicators such as industrial production, services activity and GST collections point to healthy economic momentum in the first quarter. That said, we expect India’s gross domestic product (GDP) growth to moderate to 6.6% this fiscal from 7.7% last fiscal, as two factors that supported growth and contained inflation then, namely lower crude oil prices and favourable weather, have become less supportive.
Global GDP growth is also expected to ease to 3.0% in 2026 from 3.5% in 2025, according to the IMF. A slowdown across key export markets, including the US, Europe and the broader Middle East, is likely to constrain demand for Indian goods and weigh on overall economic activity.
Domestic balance sheets, however, remain a source of resilience, with both lenders and corporates entering this phase from a position of strength. According to Crisil Ratings, the median debt-to-equity ratio of medium and large corporates remains low at 0.45, providing financial flexibility and the capacity to invest. Nevertheless, heightened uncertainty often delays investment decisions, potentially curtailing the private capital expenditure cycle.
Government investments, employment initiatives and direct benefit transfers by states will continue to support household consumption and cushion overall growth.
Globally, central banks remain cautious about inflation risks. Several emerging market economies, including Indonesia, South Africa and the Philippines, have already tightened monetary policy. The European Central Bank has also raised interest rates this year.
Meanwhile, despite the US Federal Reserve’s hawkish pause, US bond yields have risen as markets continue to price in the possibility of further tightening.
Against this backdrop, expect Mint Road to keep an eagle eye on incoming data. If geopolitical uncertainties persist and weather-related risks materialise, the possibility of a 25-basis-point repo rate hike later this fiscal cannot be ruled out.
(The author is chief economist, Crisil Ltd)
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.