The RBI has reduced its inflation forecast of Q2 FY26 by nearly 200 basis points, from 4% in the February policy to 2.1% in the August policy. Given this, how prominent are the downside risks to next year’s inflation projections of Q4FY26 at 4.4% and Q1FY27 at 4.9%, especially in the light of revisions to CPI basket?
The repo rate has been lowered three times since the February 2025 MPC meeting, bringing a total of 100 basis points reduction, to support economic growth. Transmission of the repo rate cuts to the lending and deposit rates happens with a lag. However, the transmission was accelerated by the hefty 50 basis point cut in June 2025 policy. By now, overall, the lending rates have gone down by 71 basis points, and the deposit rates by 87 basis points for fresh loans and deposits.
Given the lag in transmission, further softening of lending rates may happen in the coming months, especially given that liquidity continues to remain in surplus and as the effect of the cut in CRR is transmitted. While the case for stimulating private investments and urban demand remains, and the benign inflation outlook provides policy space, one has to wait and watch as the transmission of the existing actions takes place and how the trade policy uncertainties play out before considering future policy actions. In other words, the future policy actions would be dependent on the evolving growth-inflation dynamic.
In the context of tariffs uncertainty and muted global growth, will India have to settle for lower than its aspirational growth rate? In the past, strong growth phases had a strong correlation with rising exports. Do you think the RBI will have to consider lowering rates towards the end of the calendar year, or will it be pushed further?
The private investment sentiment has been adversely affected by the trade policy uncertainties caused by the US announcement of 25% tariffs on India along with additional 25% penal tariffs for buying Russian crude. The negotiations are on for the bilateral trade agreement, although paused currently. Important diplomatic initiatives taken by the US President to stop the Ukraine War are also in progress.
These initiatives may have implications for the rates of tariffs that would apply on India’s exports to the US and also for the imposition of the penal tariffs on India for buying the Russian crude. Obviously the investors would like to wait for greater clarity to emerge on the tariffs that would finally apply to India’s exports.
Your preliminary calculations suggest that tariffs may hurt the growth rate in the current year by 20 to 30 basis points. What would be the impact of additional 25% (total 50%) potential tariffs on growth? What measures does the government need to take to counter this risk?
The US tariffs on India are causing a lot of anxiety. However, as the Indian economy is primarily driven by domestic consumption and investment and less by exports, it is not so much about the effect on the growth rate, but more about the potential job losses and effect on MSMEs. This is because the US is a major market for India’s exports of labour-intensive goods such as textiles and garments, leather goods, gems and jewellery, shrimp, among other food products, all dominated by MSMEs. Hopefully, the penal tariffs for Russian oil purchase will be withdrawn, and the ongoing bilateral trade negotiations will succeed in eventually bringing down the US tariffs on Indian exports to more manageable levels and broadly in line, if not better, with the Asian peers, such as ASEAN countries and Bangladesh, and the disruption will be short-lived. Going forward, diversification of markets for goods will be important. In that context, the negotiations of the India-EU FTA need to be expedited, and the FTAs or the comprehensive economic partnership agreements with Japan and the Republic of Korea need to be reviewed to make them more effective, especially for the export of labour-intensive goods. India also needs to fully harness the potential of other FTAs such as those with Australia, UAE and the UK.
Tapping the domestic market fully for the finished consumer goods by reducing the dependence on imports would also be helpful. Enhancing the domestic value addition in consumer goods exports through building the globally known Indian brands and supply chains, including through overseas direct investments (ODI) and acquisitions of foreign retail chains, would also be important. The government is working on support measures for exporters in the labour-intensive sectors.
Hopefully, the Indian economy would be able to weather the storm and emerge stronger as it has from previous such shocks, whether the 1991 liquidity crisis, the global financial crisis of 2008/9, or the Covid pandemic!
Content Source: economictimes.indiatimes.com