Navigating economic turbulence with 3Cs

As another exogenous shock – this time from trade – unsettles the global landscape, its spillovers pose greater concern for India, which is largely dependent on domestic demand. The shifting global dynamics demand vigilance, not just to gauge the potential impact or seize an opportunity, but also for policy preparedness.

Amid evolving global uncertainties and the constant shadow of unknown weather anomalies, the decisions of the Monetary Policy Committee (MPC) reflect a nuanced, 3Cs approach — Confidence in the inflation trajectory (backed by favourable agriculture output and downward pressure on global oil and commodity prices); Caution on the growth front (recognising global headwinds while leaning on domestic demand resilience), and a Cushion for the economy through policy support (by lowering interest rates).

While the MPC forecasts a lower growth outlook (revised down by 20 basis points, or bps, compared with its February forecast), its actions will remain guided by the inflation outlook (also revised down by 20 bps).

Lower inflation, which the Reserve Bank of India (RBI) sees aligning with its target of 4% over the next 12 months, opens room for further rate cuts. We expect at least two more rate cuts of 25 bps each through the rest of this fiscal, after 50 bps till date.

Lower rates are growth-positive and deliver a cushion to growth if global shocks are harder than expected.

The MPC’s GDP growth forecast for fiscal 2026 is now at 6.5%, whereas the CPI inflation forecast is at 4%. The risks to these forecasts are evenly spread, but the uncertainty quotient remains high. Despite the forecast revisions, the growth-inflation mix remains favourable.

Crisil’s forecast of 6.5% GDP growth for fiscal 2026 has a stronger downward bias due to the US tariff announcements and their impact on India’s exports. While the economy’s direct exposure to US demand is small, the indirect impact via weaker global and trade-partner growth exerts a negative influence.

Domestic levers should support growth, though. We expect consumption to hold up this fiscal supported by lower inflation, lower interest rates, income tax relief to some segments and strong agriculture incomes. Investments are expected to get support from government capital expenditure, healthy corporate balance sheets, and rising capacity utilisation. Global uncertainty, however, could delay business decision making.

Weaker global activity, which keeps global demand subdued, will put downward pressure on global crude oil and commodity prices. This is positive for inflation in India. We see a mild downside to our CPI forecast of 4.4% for fiscal 2026.

Some pressure on the rupee/dollar exchange rate due to capital volatility could mildly offset the benefit of lower global prices.

But for the trade shock, the domestic macro backdrop provided several reasons to cheer in this policy. Retail inflation fell below the MPC’s target of 4% in February and is poised to come down further in March as food inflation spirals down. Economic activity remained healthy, as noted by the purchasing managers’ indices for manufacturing and services. And the rupee displayed resilience, though in part due to a weakening dollar.

A change in the monetary policy stance, atop the second consecutive 25 basis points repo rate reduction, gives further fillip to lower interest rates.

On the change in stance, there are two key takeaways from the RBI Governor’s statement. First, a shift in stance to ‘accommodative’ from ‘neutral’ allows for easy monetary policy setting – a tool that can stimulate growth and prepare the economy to face global risks. Second, the stance applies to policy rates and not liquidity conditions, suggesting liquidity will be managed as deemed ‘sufficient’ by the RBI, rather than easy.  These are useful cues for the bond market.

We expect the 10-year government security yield to ease this fiscal and settle around 6.6% by March 2026. In addition to repo rate cuts and fiscal consolidation, softer crude oil prices and lower inflation will provide support.

Another monitorable, though not a determinant of MPC decision on repo rate, is the US Federal Reserve’s actions. Higher tariffs and the subsequent upside to retail inflation in the US could reduce the pace and magnitude of Fed rate cuts and fuel capital volatility. So far, foreign capital flows and the exchange rate have been the first line of casualty for India.

Nervousness in global financial markets due to the expected tariff hikes induced net foreign portfolio outflows from emerging markets. In India, the period intervening October 2024 and March 2025 saw outflows of ~$19 billion, compared with net inflows of ~$22 billion in the preceding six months.

The current shock is massive and keeps foreign capital flows edgy.  However, RBI maintains ample forex reserves to cushion domestic markets from excessive volatility. We expect the central bank to use a broad range of instruments to support financial markets.

The vigil continues for now.

Dipti Deshpande is Principal Economist, CRISIL Ltd.

Views are personal, and do not represent the stand of this publication.