Greater confidence of inflation aligning with target over 12 months: RBI

With recent prints of headline consumer price inflation remaining benign, there is greater confidence that it will converge to the target of 4 per cent over the 12-month horizon, the Reserve Bank of India (RBI) said in its annual report for 2024–25, released today.

While noting that the outlook for the Indian economy remains promising, the report said softer inflation and moderate growth warrant monetary policy to be growth supportive.

‘The benign inflation outlook and moderate growth warrant monetary policy to be growth supportive, while remaining watchful about the rapidly evolving global macroeconomic conditions,’ the central bank said.

Headline inflation is projected at 4 per cent for 2025–26, while GDP growth is seen at 6.5 per cent. The six-member monetary policy committee of the RBI has reduced the policy repo rate by a cumulative 50 basis points since February while changing the stance to accommodative in the April policy, indicating the central bank’s focus on growth.

‘The outlook for the Indian economy remains promising in 2025–26, supported by revival in consumption demand, the government’s continued thrust on capital expenditure while adhering to the path of fiscal consolidation, healthy balance sheets of banks and corporates, easing financial conditions, continuing resilience of the services sector and strengthening of consumer and business optimism, besides sound macroeconomic fundamentals,’ the report said.

At the same time, the report cautioned about uncertainty around global trade following protectionist measures, protracted geopolitical tensions and global financial market volatility, which pose downside risks to the growth outlook and upside risks to the inflation outlook.

‘Going forward, easing supply chain pressures, softening global commodity prices, expected higher agricultural production supported by an above-normal south-west monsoon and elevated reservoir levels augur well for the inflation outlook in 2025–26,’ it said.

Commenting on the Indian banking sector, the report said the sector has been resilient, although heightened global uncertainties underscore the importance of proactive risk management.

‘Considering the dynamic nature of the interest rate risk, banks need to address both trading and banking book risks, especially in light of moderation in net interest margins,’ it said.

The central bank observed that despite some moderation, non-banking financial companies remain significantly dependent on banks for funding, underscoring the need for greater diversification of their funding sources.

‘The scale-based regulatory framework is expected to further improve governance and risk management,’ it said.