The revised fiscal deficit estimate for FY 2024-25 stands at 4.8%, slightly better than the projected 4.9%, and for FY 2025-26, it is expected to decrease to 4.4%, surpassing market expectations of 4.5%.
Maintaining a neutral stance, the RBI reaffirmed its priority of controlling inflation and ensuring price stability while considering economic growth. Assuming normal rainfall, the CPI inflation rate for FY 2025-26 is projected at 4.2%. Real GDP growth is projected at 6.7%, closer to the upper end of the Economic Survey’s forecast range of 6.3% to 6.8%.
This is based on strong reservoir levels, anticipated improvements in manufacturing in the second half of FY26, and expected boosts in household consumption driven by better employment conditions, tax relief in the Union Budget, moderating inflation, and robust agricultural performance. With inflation aligned with its target, the RBI stated that the time has come to adopt a more supportive stance on growth.
Despite inflation aligning with its target and optimism regarding GDP growth, the RBI maintained its stance on liquidity, citing rising global market uncertainties as a threat to inflation trajectory. The RBI also highlighted global uncertainties as a greater concern than rupee depreciation, as the former directly impacts investment, consumption, and growth. The bond market’s reaction was mixed, with yields initially rising due to the RBI’s decision to maintain a neutral policy stance and the absence of new liquidity measures.
The central bank also demonstrated its commitment to providing adequate system liquidity by taking appropriate measures to ensure orderly conditions while remaining watchful and nimble. System liquidity turned into a deficit during December 2024 and January 2025 due to advance tax payments, capital outflows, and foreign operations, among other factors.The RBI has also increased its focus on the cost of regulation for banks, announcing a deferment of the proposed LCR norms and project financing by over a year. These changes will now be implemented in a phased manner post-March 31, 2026, compared to the original timeline of April 2025, offering significant relief for banks. Additionally, the RBI has expanded its suite of interest rate derivative products by introducing forward contracts in government securities, enabling insurance funds to better manage interest rate cycles. To combat cybersecurity threats and digital fraud, the RBI will launch a dedicated Internet domain for banks and NBFCs starting April 2025. All banks and NBFCs will be required to use websites ending in ‘.bank.in’ and ‘.fin.in,’ replacing existing domains. This initiative aims to help customers identify genuine bank websites and avoid suspicious ones.
A rate cut amid global uncertainty and pressure on the INR suggests that the RBI is prioritizing growth as inflation aligns with its target. I believe the RBI has done a commendable job in FY2025 in keeping inflation anchored near its long-term target despite geopolitical uncertainties. Further, the government’s fiscal prudence has provided a valuable buffer. That being said, the RBI has taken a cautious approach with its neutral stance, leaving room for further actions in its next meeting.
