RBI monetary policy, in line with Budget, spells growth & stability
The newfound harmony between fiscal and monetary policies may well be the blueprint for navigating future economic challenges, ensuring that India’s growth story continues on a steady and vibrant trajectory
The Reserve Bank decision, at its monetary policy meeting last week, to cut repo rates by 25 basis points from 6.5 per cent to 6.25 per cent, for the first time in five years, will improve liquidity in the market and is a bold attempt to steer the economy towards growth and stability.
Instead of keeping a hawkish eye on inflation and liquidity under tight control, this approach, coupled with the proposals announced in the Union Budget for 2025-26, signals a departure from the past when lack of synchronisation between fiscal and monetary policies often resulted in policy hiccups and market volatility.
The latest Budget and RBI’s calibrated policy measures are completely in synch, which gives a clear message to markets, businesses, and consumers: that growth and stability are the two main objectives of India’s economic strategy.
The Union Budget for the next fiscal year demonstrates a strong focus on capital expenditure, innovation, and job creation. With a 33 per cent increase in capital outlay to Rs 10 lakh crore, the Government aims to invigorate infrastructure development — a proven catalyst for economic growth.
Investments in railways, roads, and energy projects are expected to have a multiplier effect, boosting ancillary industries and creating employment opportunities across sectors.
On the taxation front, the introduction of measures to simplify compliance and reduce tax burden for middle-income groups reflects the Government’s intent to enhance disposable incomes. By incentivising consumption, these reforms are expected to bolster demand, further propelling economic growth.
In parallel, the Reserve Bank has taken steps to ensure monetary stability without stifling growth. The decision to maintain a pause on policy rate hikes while trimming the repo rate and keeping a close watch on inflation dynamics exemplifies a balanced approach. The RBI’s emphasis on liquidity management and financial sector resilience underscores its role as a prudent guardian of monetary policy.
This coordinated approach has already yielded visible results. Inflation, which once threatened to derail economic recovery, is showing signs of moderation. Core sectors such as manufacturing and services are witnessing a revival, with Purchasing Managers’ Index (PMI) readings reflecting sustained expansion. The combination of fiscal stimulus and accommodative monetary policies is expected to maintain this positive momentum.
The PMIis an economic indicator that gauges the health and performance of the manufacturing and services sectors. It is based on surveys of purchasing managers from various industries and provides insights into business conditions such as production levels, new orders, employment, supplier delivery times, and inventory levels.
Beyond immediate growth prospects, the synchronised efforts between the Government and RBI are critical for navigating global headwinds. With geopolitical tensions, supply chain disruptions, and recession fears looming large in major economies, India’s cohesive policy framework provides a buffer against external shocks. This positions the country as a stable and attractive destination for global investors seeking growth opportunities in a turbulent world.
Another notable aspect of the current economic strategy is its focus on fostering innovation and sustainability. The Government’s allocation of funds for renewable energy projects, digital infrastructure, and start-up ecosystems aligns with the long-term goal of building a modern, self-reliant economy.
RBI, too, is supporting this vision by encouraging digital financial services and ensuring robust regulatory frameworks for fintech innovations.
Critically, the lessons of the past have not been forgotten. The economic disruptions caused by disjointed policy actions during previous downturns — be it the policy paralysis during the early 2010s or the abrupt cash crunch following demonetisation — highlighted the need for better coordination. Those episodes underscored how fragmented strategies could amplify economic pain rather than alleviate it.
This newfound harmony between fiscal and monetary authorities has earned praise from economists. Several of them anticipate a series of rate easing measures, citing factors such as easing inflation and softening growth.
The clear communication of policy intent has reduced uncertainty, fostering an environment conducive to investment and growth. It has also bolstered investor confidence, as evidenced by the stock market’s buoyant response and the steady inflow of foreign direct investments. However, challenges remain. Sustaining growth while keeping inflation in check will require vigilant monitoring and timely interventions. The global economic landscape remains fraught with uncertainties, and any sharp spikes in commodity prices or external shocks could test the resilience of India’s economic strategy.
