Structural Strains

The Reserve Bank of India’s decision to leave its policy rate untouched at 5.5 per cent is less about caution and more about recognition ~ it knows the easy wins from rate cuts have already been taken. Earlier this year, a full percentage point of easing and generous liquidity injections were delivered in quick succession. Now, the effects are trickling in slowly, and the returns, so far, are modest. The message is clear: when the problem is structural, cheaper money alone will not ignite a surge in growth. The growth outlook for the current fiscal remains pinned at roughly 6.5 per cent.

That figure rests heavily on the resilience of rural demand, buoyed by a favourable monsoon, while urban consumption continues to stall. Private sector investment plans, once the hoped-for driver of a new cycle, are being scaled back. In their place, the service sector – particularly construction and trade ~ is expected to shoulder much of the growth load, a gamble that leaves the economy exposed if these segments lose momentum. This is the classic policy bind ~ too much easing risks fuelling inflation later, but too little fails to spark meaningful demand now. The balancing act is complicated further by global uncertainty and a domestic economy still finding its post-pandemic footing. Inflation, for now, offers breathing space.

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The projected average is a little above 3 per cent for the year, thanks largely to falling prices in some food categories. Yet the comfort is fragile: core inflation is firm, underpinned by factors like elevated gold prices, and is forecast to rise towards the year-end. A small rate cut later in the year remains possible, but the scope is narrowing as inflation bottoms out and growth projections remain flat rather than rising. In the banking system, liquidity is abundant and set to swell further with anticipated reserve requirement cuts. But plentiful cash has not produced a lending boom. Credit growth has slowed sharply from its highs, restrained by subdued demand, tighter risk assessments, and a preference for collateralized loans.

Early signs of stress are emerging in small-business lending, hinting at the start of a new non-performing asset cycle. For banks, falling deposit rates help on the funding side, but shrinking margins and rising credit costs weigh heavily on profitability. Financial markets may still draw comfort from the liquidity cushion and the tame inflation outlook, but neither solves the underlying drag on the economy. Without stronger household income growth, better employment prospects, and renewed private investment appetite, the expansion will remain narrow and vulnerable.

External headwinds – from shifting trade conditions to higher tariffs on critical exports ~ only complicate the path forward. For now, the stance is one of policy patience. The central bank has delivered the easing it could; the heavy lifting must now come from reforms and structural fixes. Without them, liquidity surpluses risk becoming a palliative, relieving symptoms without curing the underlying ailment.