Indian Economic Overview

The Indian economy is experiencing a goldilocks situation with a high GDP growth rate of 8.2% in the second quarter and low inflation at 0.25% in October, as per the RBI governor.

Monetary Policy and Inflation

• The RBI's Monetary Policy Committee (MPC) decided to cut the policy rate, leveraging the low inflation environment while maintaining a neutral stance.
• Inflation is on a downward trend, mainly due to deflation in the food category, with a core inflation average of 4.4% over the past three months, and 2.8% excluding gold prices.
• The RBI revised its average inflation projection for FY26 downward by 60 basis points to 2%.
• Inflation is expected to average 4% in FY27 due to a low base effect.

Growth Drivers and Projections

• Current growth is driven by factors such as GST rate rationalization, reduced income tax burden, low inflation, interest rate cuts, strong rural demand, and government capital expenditure.
• Statistical factors like low deflator and base effect also contribute to growth.
• GDP growth is expected to moderate due to higher US tariffs, with projections of 7.5% for the full year and 7% in FY27.

Trade and Current Account Deficit

• India's non-petroleum goods exports to the US have declined by 12% in recent months.
• Overall non-petroleum goods export growth contracted by 3.2% in September-October compared to 7.4% growth in April-August.
• Despite this, services exports and stable global crude oil prices keep the current account deficit at approximately 1% of GDP in FY26.

Exchange Rate and Liquidity Management

• The Indian rupee is undervalued by about 3% on a REER basis; however, the weakening dollar index supports a potential reversal of this trend.
• The RBI emphasizes ensuring adequate liquidity and policy rate transmission with 125 basis points of rate cuts marking the end of the current cutting cycle.

Policy Outlook

• With a projected real interest rate of 1.25% in FY27, the RBI sees no immediate need for further rate cuts due to healthy GDP growth projections.
• Global uncertainties persist, necessitating preparedness for policy support if the growth outlook deteriorates, especially given the limited scope for fiscal stimulus.
• The RBI maintains a dovish tone, indicating potential for future rate cuts if necessary.