RBI Gives Support for Growth in Choppy Waters

Even RBI's own estimates show growth is expected to pick up in FY27 to 6.7%

- B. PRASANNAL SAMEER NARANG

The Reserve Bank of India had a challenging task in determining the course of interest rates and policy stance amid extreme currency volatility, uncertainty in financial markets, and headwinds to growth. However, RBI's monetary policy committee has unambiguously addressed these challenges by announcing a rate cut and shifting the stance from 'neutral' to 'accommodative', providing clear guidance and signaling a supportive approach to India's growth-inflation dynamics.

These dynamics justify the 'accommodative' stance, creating room for a repo rate cut of 100 basis points during this cycle. Surplus liquidity conditions further enhance transmission through lower deposit rates in the banking system. By delinking its stance from liquidity management, RBI has retained operational flexibility to address liquidity needs effectively.

While the direct impact of the US' reciprocal tariffs on India is limited, weaker global growth will affect India's exports to the US. In our view, the additional tariffs announced so far are estimated to reduce India's growth by 0.3% in 2025-26.

Indirect effects, such as lower services exports, remittances and foreign inflows, will also be felt. However, lower oil prices and RBI's policy support are expected to cushion these impacts. That is why RBI has lowered its GDP growth estimate for FY26 by only 0.2 percentage points to 6.5%.