Receding inflation pressures across economies, though still above targets in some advanced nations, have opened space for more accommodative monetary policies in the coming months, the Governor noted.
File Photo: IANS
The global economic growth has remained resilient over the past year, even as persistent risks from geopolitical developments, trade tensions, policy uncertainty and economic fragmentation continue to cloud the outlook, said the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) minutes, citing Governor Sanjay Malhotra.
Receding inflation pressures across economies, though still above targets in some advanced nations, have opened space for more accommodative monetary policies in the coming months, the Governor noted.
Advertisement
Financial market sentiment remains cautious amid uncertainties over divergent policy paths of major central banks and regional disparities in macroeconomic outcomes, the Governor said in his statement, as cited by the MPC minutes.
Advertisement
On the domestic front, the first half of the year (H1) recorded strong economic growth, supported by a combination of favourable factors such as direct and indirect tax rationalisation, monetary easing, supportive financial conditions and benign inflation.
While economic activity has remained resilient in the third quarter, some leading high-frequency indicators point to a moderation in growth momentum in the second half (H2) compared with H1.
Despite this moderation, the Governor said real GDP growth is now expected to exceed 7% for the year, significantly higher than the 6.5% projected at the beginning of the year, as strong domestic fundamentals outweigh external headwinds.
Looking ahead, growth in the first half of the next year is projected to remain robust, though moderating to around 6.7–6.8%, he added.
On inflation, the Governor highlighted that headline inflation in H1 of 2025-26 turned out to be much softer than anticipated, driven by a broad-based moderation in prices, particularly a sharp decline in food inflation.
Core inflation, measured as CPI excluding food and fuel, remained rangebound despite rising prices of precious metals. Core inflation excluding precious metals has remained subdued since early 2024, hovering between 2.5 and 3.4%.
Going forward, the Governor said favourable agricultural output, low food prices and an exceptionally benign outlook for international commodity prices are likely to keep headline inflation for 2025-26 around 2%, nearly half of what was projected at the start of the year.
Headline inflation is expected to move closer to the RBI’s 4% target in the first half of 2026-27. Inflation excluding precious metals is projected to remain significantly lower, continuing the trend seen since 2024.
The Governor noted that demand pressures in the economy remain minimal, as reflected in low core inflation, and are expected to stay subdued over the next three quarters. In light of the benign inflation outlook, both headline and core, he said real interest rates need to be lower.
“Considering these factors, I vote for a 25 basis point cut in the policy rate,” the Governor said, adding that such a move would help stimulate demand and support growth.
He also expressed support for retaining a neutral monetary policy stance, underscoring that it provides flexibility to remain data-dependent and respond appropriately to evolving macroeconomic conditions.
Advertisement
