By Anjan Roy
The Reserve Bank of India announced its new credit policy on August 5, keeping the policy interest rates unchanged. The policy interest rates are an extremely important tool used by a central bank for maintaining price stability and the pace of the economy.
On the face of it, it looks rather askance as current inflation rate is well above the target rate of inflation. The Reserve Bank has projected inflation to remain over around 5% in the coming months to opening days of the next financial year. Against this, RBI targeted level of inflation is 4%.
The reason RBI has chosen to retain the current level in interest rates, instead of raising it to rein in inflation to the targeted level, is that its analysis of the inflation dynamics convinces the policy maker that this was a limited kind of price rise and there is little fear of a general price increase.
Going into the details of inflation figures the RBI has worked on, “CPI inflation for 2026-27 is projected to be 5.0 per cent with Q2 at 4.7 per cent; Q3 at 5.9 per cent; and Q4 at 5.5 per cent. Inflation for Q1:2027-28 is projected at 5.3 per cent with risks being evenly balanced.”
But RBI pointed out that core inflation, that is, excluding fuel and food prices, the prints are in comfortable zone. That is, the current inflationary pressure is emanating mainly from two groups of articles, fuel and food. Of these, the fuel inflation is due mainly to volatility stemming from the Middle East war.
Once the war situation stabilises, it is reasonable to expect the fuel inflation should come down considerably. Hence raising the policy rates for the sake of containing some temporary spikes might hurt the overall growth prospects and the economy.
As for food prices, these have a seasonal behaviour and therefore the inflationary trends should also change. Generally speaking, the food prices spike in the summer months and till the harvest season in late October. Thereafter the food prices tend to soften after the arrival of food items in the markets.
With such a background, the RBI has taken the gamble to encourage growth of the economy through a more accommodating stance in monetary policy. The bank analysis of the growth-inflation dynamics point towards a tilt towards supporting growth than a need for some emergency brakes to control inflation. It is more optimistic than a cautionary tale of control, based on Reserve Bank’s trust on domestic demand as a trigger for continuing growth.
The Reserve Bank approach is fundamentally data driven, that is, fine tuning its monetary policy in the context of emerging data. All central banks promise that and so also RBI. Nevertheless, in the end, it is the gut feelings —the judgment—which have been known to really prompt the actions.
Given the data cited by the RBI governor in his policy statement, it appears the current policy is crafted principally to aid the continuing growth of the Indian economy while maintaining price stability within that framework of an expanding economy. A good starting point for a policy stance of helping the domestic economy in the midst of a generally gloomy picture of the global situation.
Such a stance should also ring a sympathetic bell with the government. Administration generally expect a helping hand from the central banking authority by way of maintaining an accommodating stance in monetary policy. Look at what the RBI governor has observed in his policy statement.
“Amidst persistent global uncertainty, domestic economic activity has exhibited resilience as reflected by the high frequency indicators available for the first quarter”, RBI cites. Now take a hard quick look at the data sets, quoted by the RBI governor, Sanjay Malhotra:
Private consumption continued to be driven by buoyant discretionary spending, while investment activity remained steady on the back of robust government spending on infrastructure and construction.
Motor vehicle sales (retail) grew by 14.5 per cent in the first quarter of 2026-27. Two-wheeler and tractor retail sales registered double digit growth of 15.1 per cent and 21.4 per cent in the same period, respectively.
On the other hand, retail passenger vehicle sales and IIP consumer durables off take grew at a robust pace of 21.0 per cent and 7.2 per cent in the same period, respectively. Steel consumption grew by 8.3 per cent while cement production increased by 8.8 per cent in in the first quarter of 2026-27. Port cargo witnessed a growth of 6.1 per cent in Q1:2026-27.
Early results of corporates for Q1 indicate healthy performance in the manufacturing sector. This is also corroborated by an expansionary PMI. Services activity too maintained its momentum in the wake of strong domestic demand.
As on August 1, 2026, the results of 413 listed private manufacturing companies reported a growth of 21.9 per cent in net sales and 15.7 per cent in operating profit in the first quarter 2026-27. IIP manufacturing recorded a growth of 6.3 per cent in quarter 1. Within the Manufacturing sector, 16 out of 23 industry groups have recorded a positive growth in first quarter 2026-27 over the same period last year.
The manufacturing PMI at 54.6 in Q1:2026-27 continued to remain in expansionary zone (55.4 in Q4:2025-26). GST E-way bills increased by a healthy 12.4 per cent in Q1:2026-27, while toll collections (volume) increased by 16.1 per cent. GST revenue rose by 8.6 per cent in Q1:2026-27. Domestic air cargo posted a growth of 9.1 per cent in Q1:2026-27.
There’s enough good news for the RBI to take a positive stance and peg its policy on the side of aiding the growth dynamics than hold back with a hike in the policy rates. (IPA Service)
