Cautious Optimism

While inflation has eased, core inflation remains stubborn, and any significant increase in oil prices could push inflation higher

- ADITYA SINHA

In its meeting earlier this month, the Monetary Policy Committee (MPC) decided to keep the policy repo rate steady at 6.50%. This decision marks a shift to a "neutral" monetary policy stance, indicating that the committee is neither inclined to tighten nor ease monetary conditions in the near term. The rates for the standing deposit facility (SDF) and the marginal standing facility (MSF) remain unchanged at 6.25% and 6.75%, respectively.

The neutral stance is primarily driven by the potential rise in inflation due to external pressures, especially the possible escalation of war in the Middle East and its impact on crude oil prices.

The Reserve Bank of India also released the Monetary Policy Report. According to it, India's economic trajectory in 2024 has demonstrated resilience, with Q2 GDP growth moderating to 6.7%, down from 8.6% in Q4 2023. This deceleration is partly driven by external pressures such as slowing global demand, geopolitical tensions, and softening manufacturing momentum in key export markets.

India's reliance on the robust performance of its services sector has cushioned the impact. However, the manufacturing sector, which has experienced sluggish export growth due to weaker demand from advanced economies, remains vulnerable to global headwinds. According to the IMF's projections, while India's growth prospects remain strong compared to other emerging markets, the external sector could face increasing challenges if geopolitical tensions escalate or if there is a sharper-than-expected slowdown in global trade.