The first MPC meeting in the new fiscal comes amid unprecedented global uncertainty
As the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) meets from April 6–8 — its first review in FY26 — it confronts a complex and unusually conflicting macroeconomic backdrop. Inflation has eased more sharply than expected, opening the door for further rate cuts. Yet, a weakening rupee, sustained foreign outflows, and global trade disruptions complicate the path ahead.
The policy repo rate currently stands at 6.25%, following February’s 25 basis point cut. Market consensus now points to another 25 bps reduction to 6.00%. While the case for easing is compelling on the domestic front, external vulnerabilities make this far from a straightforward decision.
Disinflation Opens the Door
Retail inflation has softened significantly, with CPI at 3.61% in February 2025, a seven-month low and below the RBI’s 4% target. Food inflation, long a concern, has cooled due to improved crop output and stable supply conditions. This disinflationary trend gives the MPC a rare cushion to support growth without risking price instability.
However, growth signals remain uneven. GDP growth for Q3 FY25 came in at 6.2%, with the full-year estimate at 6.5%, marking a sharp moderation from FY24’s 9.2%. Industrial output tells a similar story. IIP growth slowed to 4.0% for FY25, a four-year low, reflecting weak demand conditions, particularly in consumer non-durables. Although manufacturing showed modest improvement in Q3, the recovery lacks depth.
This divergence—soft inflation but moderate growth—tilts the balance in favour of further monetary easing.
The Rupee Constraint
The external sector, however, presents a significant constraint. The rupee has weakened toward the ₹94 per US dollar mark, reflecting sustained pressure from capital outflows. Foreign portfolio investors have withdrawn over $12 billion in Q1 CY25, driven by higher yields in advanced economies and rising global uncertainty.
A rate cut risks narrowing the interest rate differential with the US, potentially accelerating outflows and adding further pressure on the currency. For the RBI, this creates a classic policy dilemma: support domestic growth or defend external stability.
That said, India retains some buffers. Foreign exchange reserves remain adequate, providing room for intervention to manage volatility. Additionally, softer crude oil prices have eased imported inflation risks, offering some protection against currency depreciation.
Markets Reflect Rising Stress
Financial markets have already responded to these pressures. In early April, benchmark indices saw sharp corrections, with the Nifty 50 falling over 3% to 22,161 and the Sensex declining nearly 3% to 73,137 in a single session. Volatility surged, reflecting heightened investor anxiety.
Foreign investor selling has intensified in this environment, while domestic institutional flows have only partially offset the pressure. The result is a market increasingly sensitive to external shocks.
Earnings and Investment Weakness
Corporate performance further underscores the fragile growth environment. Q3 FY25 earnings were among the weakest in recent years, with Nifty 50 profit growth at around 5% year-on-year. Revenue growth remained modest, indicating that demand recovery is still not broad-based.
The weakness is more pronounced in smaller firms, with small-cap earnings contracting, highlighting stress in the broader corporate ecosystem. Sectoral trends also remain uneven—financials continue to perform strongly, while global cyclicals such as metals and oil & gas lag amid weaker external demand.
This subdued earnings trajectory weakens private investment momentum, reinforcing the need for supportive monetary conditions.
Labour Market: Mixed Signals
Labour market indicators present a nuanced picture. The overall unemployment rate stands at 5.1%, reflecting gradual improvement. However, youth unemployment remains elevated at 13.8%, particularly in urban areas.
This gap points to a structural issue: economic growth is not translating proportionately into job creation. While monetary easing can support credit growth and MSME activity, it cannot fully address employment challenges without complementary structural reforms.
What to Expect from the MPC
Against this backdrop, the MPC is widely expected to deliver a 25 basis point rate cut, bringing the repo rate to 6.00%. More crucial, however, will be the policy stance. A shift from ‘neutral’ to ‘accommodative’ would signal a clear easing bias, shaping expectations for the rest of FY26.
Liquidity management will also be key. The RBI has already infused significant liquidity into the system in recent months. Ensuring adequate liquidity will be essential for effective transmission of rate cuts to the real economy.
A Delicate Policy Balance
The April MPC meeting highlights the challenges of policymaking in a volatile global environment. The RBI must support domestic growth without triggering destabilizing capital flows or excessive currency depreciation.
The expected rate cut is therefore not merely a response to falling inflation—it is a calibrated attempt to sustain growth momentum amid rising external risks. The real signal will lie in the RBI’s forward guidance and its ability to manage this delicate balance.
As FY26 begins, the central bank’s task is clear but complex: to nurture growth while preserving stability in an increasingly uncertain global landscape.
Dr. Badri Narayanan Gopalakrishnan is an Distinguished Fellow, Pahle India Foundation and former head, trade, NITI Aayog. Chirayu Sharma is an independent research analyst.
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