Growth has many sparks but tariff can dim glow

High-frequency indicators pointed to the likelihood of robust September-quarter growth, central bank governor Sanjay Malhotra had said during the October 1 monetary policy review, although he was more circumspect about the pace of economic expansion in 2H of FY26 due to the impact of punitive US tariffs.

“Several indicators suggest that agricultural prospects are bright in the current year; consequently, rural demand is likely to be buoyant," Malhotra was cited as saying in the minutes of the policy review published Wednesday. "Strong services sector growth and steady employment conditions would support growth. “Thereafter, however, it is expected to soften due to the impact of tariffs, although the GST rationalisation would partially cushion the impact.”

During the October 1 policy review, the Reserve Bank of India (RBI) had increased its GDP growth forecast for the second quarter to 7% from 6.7%, and that for FY26 to 6.8% from 6.5%, while indicating that growth would be frontloaded.


Malhotra said that policy uncertainty, rapidly evolving developments, and the foggy outlook suggest the Monetary Policy Committee (MPC) exercise caution and take a view for each policy as per the then prevailing macroeconomic conditions and outloo

On October 1, the six-member MPC unanimously decided to keep the repo rate unchanged at 5.50%. The MPC also decided to continue with a neutral policy stance.

Elbow Room
RBI Deputy Governor Poonam Gupta said that slower growth in H2 and a benign inflation rate have potentially opened some space for lowering the policy rates further.

Yet, she said it was difficult for her to vote for a rate cut at this juncture for three reasons: Steps taken by the government to boost consumer sentiment are working through, past rate cuts are being transmitted, and the global uncertainties are evolving at a very fast pace.

The recent fall in Consumer Price Index-based inflation and expectations the gauge would undershoot RBI’s projections have bolstered the case for rate cut. Data published Monday showed CPI inflation fell to an eight-year low of 1.54% in September.

Indranil Bhattacharyya, RBI executive director and one of the three internal members, said that current ultra-low levels of inflation should be seen as a transitory phenomenon.

Bhattacharyya said he voted for a pause as a rate cut, amid heightened uncertainty, may not have the intended impact. In addition, given that the market had not expected a rate cut, doing so would surprise the market, which is detrimental in terms of policy credibility over the medium term.

External member Ram Singh, who favoured a change in stance to accommodative, said one more rate cut ran the risk of an overdose when transmission of past reductions was yet to play out.

“The available scope for rates can be leveraged to sustain the growth momentum for a longer period by extending the easing cycle. A change in stance to accommodative increases the odds of a rate cut in this easing cycle,” he said.

Nagesh Kumar, external member of MPC, called for supporting measures via liquidity provision, credit guarantees/ moratorium for MSMEs would be important. He said while the effect of higher tariffs on the economic growth rate may be limited to between 40 and 60 basis points, a larger effect is expected on MSMEs and jobs.

One basis point is a hundredth of a percentage point.