New Delhi: The decline in retail inflation to a level that is below the RBI’s targeted level of 4 per cent is expected to pave the way for accelerating GDP growth ahead as it provides the central bank with more headroom to cut interest rates and expand liquidity to spur economic activity and create more jobs.
A Moody’s report expects monetary easing, apart from the government’s capital expenditure and tax cuts for the middle-class, to play a key in role in accelerating India’s growth rate. The report expects the country’s GDP growth to exceed 6.5 per cent in 2025-26.
The report states that following a temporary slowdown in mid-2024, India’s economic growth is expected to accelerate and register one of the fastest rates among the world’s large economies. Bank of Baroda economist Dipanwita Mazumdar said: “With the current inflation print in line, we believe CPI would undershoot RBI’s target in Q4, thus opening more policy space by RBI in terms of easing, to support growth. We expect CPI to be at 4.6 per cent in FY25 with Q4 now at 3.8 per cent.”
This is lower than the RBI’s estimate of 4.4 per cent for the fourth quarter. Similarly, a Crisil report states that India’s GDP growth is expected to hold steady at 6.5 per cent in fiscal 2026. Besides budgetary support, the RBI’s interest rate cuts, lower crude oil prices and a normal monsoon are expected to support growth.
“In the coming months, we expect food inflation to remain soft, supported by healthy crop output, benign global prices and a high base of fiscal 2025. Non-food inflation could see a slight uptick due to a low base and the impact of a weaker rupee. In fiscal 2026, we expect headline inflation to average 4.4 per cent (vs an estimated 4.7 per cent in fiscal 2025), driven by softer food inflation,” the report further states.
RBI Governor Sanjay Malhotra last month announced a 25 basis cut in the policy rate from 6.5 per cent to 6.25 per cent in the monetary policy review to accelerate growth amid global uncertainties. He said that inflation has declined and is expected to further moderate and gradually align with the RBI’s target of 4 per cent.
The monetary policy decision maintains a delicate balance between controlling inflation and pushing up the growth rate in a slowing economy, The MPC also unanimously decided to continue with its neutral stance in monetary policy and will focus on inflation while supporting growth. This would provide flexibility to respond to the macroeconomic environment, Malhotra said.
Now, with inflation continuously trending downwards in recent months to touch a 7-month low of 3.6 per cent in February, there is expected to be less pressure on the RBI on the price front which will enable it to go in for easing monetary policy further to push growth.
