Monetary Policy: Supporting Growth with Stability Amid Global Headwinds
Moneycontrol.com, 07 February, 2025: The Reserve Bank of India’s (RBI) recent monetary policy decision marks a significant shift after nearly five years of maintaining status quo. With a 25-basis-point reduction in the repo rate to 6.25%, the Monetary Policy Committee (MPC) has taken a decisive step toward balancing growth with inflation control. This move, set against the backdrop of global economic turbulence, underscores the importance of a proactive approach to economic management—one that supports domestic expansion while remaining vigilant to external risks.
The global economic landscape remains fraught with challenges. Despite signs of resilience, world trade continues to expand at a slower pace, and disinflation progress appears to be stalling. The U.S. Federal Reserve’s measured stance on interest rate cuts has led to a stronger dollar, hardening bond yields, and prompting capital outflows from emerging markets. These developments have tightened financial conditions globally, creating ripple effects that India cannot ignore.
Recognizing these realities, the RBI has opted for a neutral monetary stance, emphasizing inflation alignment while fostering growth. The decision to cut rates was driven by multiple factors, including a favorable inflation trajectory, improving economic indicators, and the need to maintain India’s competitive standing in an uncertain global economy.
The Indian economy, while resilient, is not immune to global headwinds. Inflation has been moderating, thanks to favorable food supply conditions and the effective transmission of past policy actions. Real GDP growth for FY26 is projected at 6.7%, supported by robust agricultural output, a gradual manufacturing recovery, and strong business sentiment in the services sector. A crucial driver of this growth is public and private investment. The government’s commitment to capital expenditure in the Union Budget 2025-26, coupled with tax relief measures to boost household consumption, bodes well for demand-side dynamics. Additionally, improving employment conditions and stable inflationary trends are expected to sustain momentum in consumer spending.
However, the journey ahead is not without risks. Excessive financial market volatility, policy uncertainties in global trade, and adverse weather conditions remain potential disruptors. The RBI’s liquidity management strategy will play a pivotal role in mitigating these risks while ensuring that economic expansion remains on track. Liquidity has already tightened due to forex operations and an increase in currency circulation, turning into a deficit in late 2024 and early 2025. Proactive steps to manage both transitory and durable liquidity are critical to maintaining financial stability.
India’s current account deficit (CAD) is expected to remain well within sustainable levels, supported by stable forex reserves of approximately $630 billion. With a resilient services sector and continued emphasis on domestic consumption, India’s macroeconomic fundamentals remain strong. Despite short-term fluctuations, the overall trajectory of inflation is expected to align with the RBI’s target of 4%, aided by the easing of food inflation pressures and a moderate rise in core inflation.
Monetary policy, however, cannot work in isolation. The RBI’s policy measures must be viewed in conjunction with fiscal policy initiatives. The government’s fiscal discipline, focus on infrastructure spending, and targeted social sector investments provide a strong foundation for economic resilience. The MPC’s decision to reduce borrowing costs complements these efforts, making credit more accessible to businesses and individuals. Increased investment in rural development, digital infrastructure, and sustainable energy projects will further drive economic inclusivity, ensuring that growth is both broad-based and equitable.
The central bank’s commitment to financial stability is evident in its regulatory actions. The introduction of forward contracts in government securities, expanded market access for non-bank brokers, and enhancements in cybersecurity frameworks are crucial steps toward strengthening India’s financial ecosystem. These measures not only improve market efficiency but also ensure that the economy remains insulated from external shocks. By expanding financial market access and strengthening risk management frameworks, the RBI is fostering a more resilient and dynamic financial system.
Amidst these developments, it is essential to acknowledge the evolving role of digital payments and cybersecurity in India’s economic framework. The introduction of exclusive banking domains, such as 'bank.in' and 'fin.in', is aimed at enhancing cybersecurity and preventing digital fraud in financial transactions. These initiatives will build trust in digital banking and encourage greater financial inclusion, supporting the long-term objectives of monetary policy.
Going forward, the RBI will continue its vigilant approach, responding dynamically to evolving economic conditions. While the current inflation outlook appears favorable, global commodity price fluctuations and geopolitical uncertainties could pose fresh challenges. The central bank’s flexibility in adjusting policy levers will be essential to maintaining growth momentum without compromising macroeconomic stability. Strengthening coordination between fiscal and monetary policies will be key in ensuring long-term economic stability. As India navigates a complex global economic landscape, maintaining a balanced approach between growth and stability will be crucial in sustaining economic progress and ensuring that the benefits of development reach all segments of society.
The monetary policy path adopted by the RBI fosters growth while safeguarding financial stability. By maintaining a data-driven and forward-looking approach, India can navigate the complexities of the global economy and emerge stronger in the years ahead. As policymakers, businesses, and investors align their strategies with these economic imperatives, India is poised to remain one of the fastest-growing major economies, demonstrating resilience, adaptability, and a vision for sustained progress.
Nirmal Jain is the founder and MD, IIFL Finance
