Advancing the Indian Development Strategy - Part Three
Supporting India's Growth Amid Moderating Inflation and Global Uncertainties
In a bid to sustain India's emerging market economy amid moderating inflation and external shocks, the Reserve Bank of India (RBI) has adopted a cautious yet flexible monetary policy approach.
The current policy repo rate stands at 5.50%, with room for further rate easing if necessary to support growth without stoking inflation. Inflation forecasts for FY26 have been revised downward to 3.1%, providing the central bank with the scope to accommodate monetary easing or maintain a neutral stance. To inject more liquidity into the banking system, the RBI has announced cuts to the cash reserve ratio (CRR) starting from September 2025.
The monetary policy in India is not a one-man show. Coordination with fiscal policy is crucial to create policy space and reduce vulnerability to external shocks. A sound fiscal balance and a sustainable current account deficit are recommended to achieve this. Encouraging stable, longer-term capital flows and maintaining adequate foreign exchange reserves help stabilise the exchange rate and financial markets, especially in a context of global policy tightening and geopolitical uncertainties.
Coordinated efforts to avoid excessive exchange rate appreciation through macroprudential policies and strategic forex interventions can complement inflation targeting by the RBI to stabilise prices and growth. In the medium term, India’s monetary policy should remain flexible and forward-looking, balancing inflation targeting with output stabilisation.
Fiscal policy, on the other hand, should aim for prudent spending and investment in infrastructure and human capital to sustain growth momentum driven by demographic and digitalization trends. By adopting these strategies, India can harness its demographic dividend and emerging consumer market strengths while cushioning against global uncertainties.
In summary, the key strategies to support growth amid current low inflation and external uncertainties are:
- Maintain or cautiously lower policy rates with a neutral stance.
- Implement liquidity-enhancing measures like CRR cuts.
- Ensure fiscal prudence to maintain macroeconomic stability.
- Encourage stable capital inflows and buffer exchange rate volatility with reserves and macroprudential tools.
- Align monetary and fiscal policies to enhance policy space for responding flexibly to shocks.
By following these combined policies, India can navigate through the current economic landscape, ensuring low borrowing costs and positive returns to savers, while maintaining a stable and conducive environment for growth. However, it is important to avoid over-reaction in liquidity infusions and to use tools to adjust short-term liquidity to keep the weighted average call money rate near the repo.
[1] RBI Press Release, August 2025. [2] Finance Ministry Statement, September 2025. [3] IMF Working Paper, October 2025. [4] RBI Monetary Policy Report, November 2025. [5] RBI Statement on Developmental and Regulatory Policies, December 2025.
- The Reserve Bank of India (RBI) has adopted a cautious yet flexible monetary policy approach to sustain India's growth amid moderating inflation and external shocks.
- Coordination with fiscal policy is crucial to create policy space and reduce vulnerability to external shocks in India's economy.
- A sound fiscal balance and a sustainable current account deficit are recommended to achieve this coordination between monetary and fiscal policies.
- Encouraging stable, longer-term capital flows and maintaining adequate foreign exchange reserves help stabilise the exchange rate and financial markets.
- In a context of global policy tightening and geopolitical uncertainties, coordinated efforts to avoid excessive exchange rate appreciation are necessary.
- India's monetary policy should remain flexible and forward-looking, balancing inflation targeting with output stabilisation in the medium term.
- Fiscal policy should aim for prudent spending and investment in infrastructure and human capital to sustain growth momentum driven by demographic and digitalization trends.
