Introduction to India’s Economic Outlook
The Monetary Policy Committee’s decision on the repo rate will be a complex one, given the current economic conditions. Inflation has decreased faster than expected, with the October Consumer Price Index inflation at 0.25% year on year, which is a series low. The Reserve Bank of India’s forecast for average CPI inflation for 2025-26 has been revised lower by 160 basis points in just eight months.
Economic Growth and Inflation
On the other hand, GDP growth has continued to surprise on the upside, averaging 8% in the first half of 2025-26. However, the latest nominal GDP growth of 8.7% is one of the weakest prints in almost half a decade. The earnings of several companies have surprised on the higher side during Q2, and consumption has picked up, aided by tax rebates and festivities. However, the trend remains mixed, with recent housing and automobiles sales indicating that sales of premium products are doing the heavy lifting.
Industrial Activity and Consumer Confidence
Industrial activity has been a mixed bag, with a recent survey by the Small Industries Development Bank of India pointing to a slight moderation in business optimism among Indian micro, small and medium enterprises (MSMEs). A recent survey by the National Bank for Agriculture and Rural Development (NABARD) highlighted that a lower percentage of the rural population reported a rise in income and consumption. Urban consumer confidence continues in the “pessimistic" zone, as per an RBI survey, despite inching higher.
Cloudy Outlook
Trade friction and policy uncertainty continue to cloud the economic outlook, with the International Monetary Fund’s World Uncertainty Index doubling since January. India’s merchandise trade deficit widened to a record in recent months, driven partly by higher imports of bullion, and exporters scrambling to maintain competitiveness amid high US trade tariffs. Despite India’s healthy forex reserves and markedly favourable macro-financial dynamics on most counts, the Indian rupee depreciated by 4.5% against the dollar during 2025.
Bank Credit and Loan Accounts
Bank credit grew 11.3% year on year at the end of October, moving higher – albeit modestly – in recent months. However, digging a notch below the headline reveals that bank credit excluding gold loans grew merely at about 8%. The contribution of gold loans to bank credit had been higher than that of housing loans and loans to MSMEs and large industries. Furthermore, the number of active loan accounts in the Indian banking system declined 1.4% year on year, and even more rapidly during the nine-month period ended September 2025.
Hesitant Transmission
The weighted average interest rate on banks’ fresh term deposits and lending rates fell by 105 bps and 69 bps, respectively, during February to October, when the repo rate was lowered by 100 bps. However, transmission has been considerably limited and hesitant on the debt market side, with the benchmark 10-year yield moving lower by only about 15 bps during this period. Lingering concerns over higher borrowings on the back of tax reforms, the RBI’s currency market interventions, and bouts of volatility in longer-term global yields have been some of the key factors in keeping domestic yields sticky.
Conclusion
In sum, several MPC members have recently flagged that space for monetary policy support has re-emerged, given the recent growth-inflation dynamics. It is widely perceived that another 25-50 bps easing in the repo rate is possible during the current cycle, barring any major unforeseen surprise. However, along with appropriate sequencing and signalling, a supportive liquidity condition can be the key to further rate transmission in the desired direction. The RBI’s decision on the repo rate will be crucial in determining the future course of the economy, and it remains to be seen how the committee will balance the competing factors to make its decision.
