The RBI Monetary Policy Committee (MPC) kept the policy rate unchanged, along expected lines, although it deftly navigated all the turbulence in its stride. The RBI governor’s statement outlined the challenges — exogenous as also internal — and was very conscious of the sword of Damocles hanging in West Asia, whose ripple effects are being felt the most across energy and supply chains. The policy statement reaffirms that rate hikes are pushed beyond FY27 and the bar for a rate hike is significantly higher now.
On the growth front, resilient domestic demand has largely been able to cushion the impact of external headwinds, with material parameters and indicators like healthy growth in the corporate balance sheet top line as well as profitability signalling broad-based strength. Overall exports in Q1 of 2026 have risen by 11.4% (in dollar terms), front-led by merchandise goods (15.9%) and belying most apprehensions about trade disruptions. Investment, consumption, and discretionary spending are expected to retain their positions due to policy measures and increased government spending that crowds in private investments. Incidentally, investment announcements have risen to an all-time high of ~`84 lakh crore, led by new-age sectors whose share hovers around a third, signalling a need to rescript the traditional growth model.
Along such a landscape, the regulator has forecasted real GDP growth for FY27 at 6.7%. We believe there is a fair chance of upward revision in these numbers in the second half should the global confrontation peter down and supply chain frictions minimise.
On the inflation front, while core inflation remains under control for now, the headline can spike upwards for a few months, though largely in sync with the RBI’s inflation band.
System liquidity is likely to remain in a comfortable zone and rise disproportionately if major proceeds of the foreign currency non-resident (bank) [FCNR(B)] hit the street. That should also have a cascading effect on various policy and market-linked lending rates, smoothing the curves and reducing the pressure on resource mobilisation by lenders. Consequently, the transmission of rates for both lending as well as deposits may be seen along some products/buckets, apart from softening benchmark yields. Credit growth has remained strong at 17-18%, above the anticipated targets, indicating demand from various quarters even as capital markets strive to normalise and meet the growing needs of India Inc.
The rupee has of late responded positively to policy-regulatory measures and can benefit if crude oil prices crash, apart from a wide arsenal kept in readiness and a regulatory vigil without any control or confrontation of its trajectory and level. The FCNR(B) euphoria has been sustained, the leverage mechanism and the benefits of swaps finding some willing foreign banks to come aboard despite initial hesitation, while domestic banks have been championing the cause in spite of constraints galore.
On the external front, the current account deficit has remained in modest surplus anchored by services exports and unwavering remittances flow. However, the widening merchandise trade deficit is worrisome in volume terms. Solace comes from a rebound in FPI activities that seem to return to emerging markets like India (cumulative debt flow has been a solid $7.3 billion in recent months). The catastrophic crash of AI champion markets like KOSPI should further fan this benign trend of revisiting allocation mid-year. FDI, a more solid barometer of investor confidence, has been pretty good on both gross and net bases this fiscal year with an improvement in rank among host economies and greenfield FDI projects presenting a good omen.
The RBI took three measures for development and regulatory policy. It has initiated a review of the loan pricing practices by banks. Pricing of bank loans has a long history of evolution keeping in mind transparency and monetary policy transmission imperatives. Until 2010, banks used the prime lending rate, followed by the base rate. After 2016, the banks have migrated to the marginal cost of funds-based lending rate. To further increase the transmission, the RBI permitted the external benchmark lending rate (EBLR) in 2019. Currently, 67.6% of bank loans are under the EBLR regime. The twin regimes need some standardisation to ensure uniformity and enhance transparency in loan pricing across entities.
The rise of a blended economy across rural and semi-urban pockets necessitates revisiting the co-operative framework (India has 1,457 urban cooperative banks or UCBs, 34 state co-operative banks, 351 district central co-operative banks, and one industrial co-operative bank of Tamil Nadu). Given the importance of UCBs in extending last-mile credit and supporting localised financial intermediation, the RBI has now introduced on-tap licensing to UCBs. This step not only harmonises the bank licensing policy but also opens ways to introduce fresh capital and innovation in this sector.
Further, given the narrow business base on the lending side, rural cooperatives continue to face the challenges of lending portfolio concentration (sector and geographic) compared to UCBs. The current measure addresses this aspect.
An interesting point in the policy statement is on exchange rates. The RBI has clearly emphasised that it will ensure no self-fulfilling prophecy is built into the foreign exchange market. The $36.7-billion FCNR(B) inflows till July 31 have enabled foreign exchange recoup of ~$20.0 billion and vacating of outstanding forward position by $13 billion in the short end (up to three months) till June-end.
Summing up, the trifecta of resilient domestic activities, exogenous shocks (mainly from West Asia), and weather-related disruptions (El Niño) should dictate the terms of reference for Mint Street even as it proactively and prudently engages in market-making activities and regulations that bode well for the system. That incidentally reminds us that its action and intent should be read like an osmosis, a diffusion that balances competing forces and resources optimally. Thus, the pause can be longer in future lest short-termism triumphs over sustainable measures.
Views are personal.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.