Monetary policy: RBI Governor Sanjay Malhotra's optimism and caution

RBI sees India's economy as resilient, but warns that geopolitical tensions, rising oil prices, inflation risks and a weak monsoon could test growth

RBI Governor Sanjay Malhotra’s core message was that India’s economy remains resilient, supported by strong domestic demand, investment, exports, financial stability and external buffers, but faces significant risks from the West Asia conflict,  elevated energy prices, supply-chain disruptions, inflation pressures and monsoon-related uncertainties. 

Tailwinds  

• India entered the current phase of global turbulence with much stronger fundamentals than in previous episodes
• Private consumption remains strong; urban consumption is expected to be supported by services sector momentum, GST rationalisation and stable employment conditions
• Manufacturing and services PMIs indicate continued expansion; business expectations remain positive despite global uncertainties
• Merchandise exports recorded strong growth in April despite higher freight and insurance costs; services exports continue to show resilience and benefit from healthy global demand
• Foreign exchange reserves stand at a healthy $682.3 billion
• FDI flows remain strong, reflecting continued investor interest in India
• Services trade surplus and inward remittances provide support to the external account

Headwinds 

• Continuing geopolitical tensions remain the biggest source of uncertainty; the duration and intensity of the conflict are unknown
• Rising crude oil and energy prices are weighing on growth and pushing up inflation; Higher fuel and input costs are beginning to pass through to domestic prices
• Disruptions to trade routes and supply chains are increasing costs and hindering economic activity
• Inflation is projected to rise towards the upper tolerance band during FY27; risks of second-round effects through wages and inflation expectations remain
• The forecast of a sub-normal southwest monsoon poses risks to agricultural output; Rural demand could be affected
• El Niño remains a significant uncertainty for both growth and inflation
• Risk-off sentiment, inflation concerns and debt sustainability worries are creating volatility across global markets; Emerging market currencies, including peers of India, remain under pressure