The narrative is changing. There are no signs of desperation, but preventive measures are being taken. The dose this time around is aggressive. The latest monetary policy of the Reserve Bank of India (RBI) just did that. It surprised everyone with a 50 basis points cut against the widely expected 25 basis points cut. There was more in store! The bigger and bolder measure was in the form of 100 basis points cut in the Cash Reserve Ratio (CRR). With this, RBI clearly states that it’s time to frontload the rate cut and give the economy and markets certainty of policy in an uncertain world.
TOUGH PATH AHEAD
Screaming headlines on India becoming the fourth largest economy, overtaking Japan, were followed by analysis of how it’s just a number and makes no sense to a country with millions of people still below the poverty line. Our metro cities are telling tales of how lopsided growth and development are. You can see both prosperity and poverty in almost all cities across India. Rural poverty is a different story; the less said, the better. The only way to reach the status of a developed nation is to grow at 7 to 8 per cent consistently over the next two decades. But the scenario has changed now. Growth is stalling, if not slowing down. It is in this context that we need to review the RBI monetary policy announced in June 2025. Data indicators gave a peek into the coming quarters/ months. Too many speed breakers have emerged over the last six months or so. Automobile growth stalled, credit off-take stuttered and strains were visible in the GDP data for the fourth quarter and the full year FY25. Economic growth measured by GDP for FY25 was 6.5 per cent, the lowest in four years. This was notwithstanding the 7.4 per cent growth recorded in the 4th quarter of FY25. The fourth quarter growth itself was `buoyed by growth in indirect taxes,’ according to SBI’s Ecowrap report. Many other economists also attributed the strong growth to the 12.7 per cent surge in indirect taxes.
AMBITIOUS TASK
RBI has maintained its growth projection at 6.5 per cent on the assumption that its aggressive policy action would keep the growth engine going. This is much short of the aspirational growth of 7 to 8 per cent needed to achieve the goal of a developed economy. We have already lost a year (2024-25 GDP at 6.5 per cent). With the projected 6.5 per cent for FY26, one more year would be lost. Achieving the 6.5 per cent itself would be an uphill task. Trade disruptions from the Trump-initiated tariff war and the physical war across the globe are seen as the main hurdles. Hence, the big push from the RBI. But the trillion-dollar question is, can cheap money revive demand for goods and services? This is difficult to answer at this stage. But in the short term, cheap money will definitely drive up demand for financial assets. Traders, investors and speculators will have a field day!