Indian economic activity stays resilient amidst trade policy and geopolitics uncertainties, says RBI Bulletin

The global economy is in a state of flux, reeling from the twin shocks of trade policy uncertainties and a spike in geo-political tensions. In this state of elevated global uncertainty, various high-frequency indicators for May 2025 point towards resilient economic activity in India across the industrial and services sectors.

Agriculture showed a broad-based increase in production across most major crops during 2024-25. The domestic prices situation remains benign with headline inflation staying below the target for the fourth consecutive month in May.

Financial conditions remained conducive to facilitate an efficient transmission of rate cuts to the credit market.

Protracted trade policy uncertainties and rising trade barriers pose the risk of significantly scarring the global economy. The intensifying geopolitical tensions too may further debilitate the already weakened growth impulses.

In this context, the trade policy outcomes in July, after the temporary tariff hiatus is over, and the future course of geopolitical events would likely shape the medium-term economic prospects.

Amidst a challenging global environment and heightened uncertainty, the Monetary Policy Committee (MPC) in its meeting held during June 4-6, 2025, decided by a majority vote (5-1) to reduce the policy repo rate by 50 bps to 5.50 per cent to stimulate domestic private consumption and investment.

A likely undershoot of inflation to below the target rate, at the margin, during the current financial year and evidence of further anchoring of inflation expectations provided the MPC with the policy space to decisively focus on growth by frontloading the rate cut.

The MPC also decided to change the stance from accommodative to neutral, considering the very limited space to further support growth in current circumstances after the cumulative 100 bps reduction in the policy repo rate since February 2025.

Going forward, as noted by the MPC in its resolution, the MPC decided to remain data-dependent to chart the future course of monetary policy and strike the appropriate growth-inflation balance.

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