Overview of Global Economic Uncertainties and India's Economic Policy Response

The global economy, including India, is currently experiencing significant uncertainties due to an escalating global trade war. In response, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has indicated a need to prioritize growth support.

Monetary Policy Adjustments

• The MPC has reduced the policy rate by 25 basis points.
• The stance was adjusted from neutral to accommodative, signaling potential further rate cuts due to growth concerns.
• The expected impact of the global trade war remains difficult to quantify, but potential adverse effects are acknowledged.

India's GDP Growth Projections

• The RBI has lowered the GDP growth projection for FY26 to 6.5% from the previous 6.7% estimate.
• India's economy is relatively less affected by US tariffs compared to other Asian economies, being mainly domestically driven.
• Exports contribute 21% to GDP, with goods exports at 12% of GDP, which is lower than countries like Thailand and Vietnam.

Economic Impact and Investment Climate

• The direct impact of tariffs on India is estimated at 0.2-0.3% of GDP.
• Global growth decline and reduced capital flows could indirectly affect India more severely.
• Private sector investment may remain weak due to global uncertainties.

Domestic Economic Factors

• Positive contributions from a normal monsoon and agricultural production are expected to support rural demand.
• Overall consumption may benefit from a lower income tax burden and moderated food inflation.
• The US's reciprocal tariff on India is lower compared to some other countries, providing export opportunities.

Inflation and Currency Dynamics

• CPI inflation moderated to 3.6% in February 2025, expected to remain below 4% in upcoming months.
• Food inflation reduced significantly, supporting overall inflation control.
• Currency dynamics involve volatility, with recent fluctuations in the US dollar and the Indian rupee.

Global Monetary Policy Context

• The US Federal Reserve may prioritize growth, potentially leading to further rate cuts.
• The European Central Bank and the Bank of England are also expected to cut rates in 2025.

Foreign Exchange and Liquidity Management

• The rupee may face pressure amid global uncertainties, with the RBI poised to intervene using its $676 billion forex reserves.
• Monetary policy transmission will be crucial in enhancing liquidity conditions, with the possibility of a deeper rate cut cycle.