RBI’s liquidity management role key to India’s inflation-control strategy: Finance Ministry

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RBI’s key role in tackling inflation

Highlights

At its October Monetary Policy Committee meeting, the RBI raised the repo rate by 25 basis points to 5.5 percent and shifted its monetary stance from neutral to calibrated tightening.
Retail inflation rose by 71 basis points to 5.54 percent in September, with food inflation at 7.74 percent, while the Index of Industrial Production increased by 8 percent in August.
As of October 16, India’s foreign exchange reserves stood at $721 billion, equivalent to 10.3 months of import cover, but pressure on the rupee and external risks persist.

This article was translated from the original. Read the original version by our correspondent here.

October review highlights rate hike and liquidity management

According to Forbes India, the Finance Ministry’s October Monthly Economic Review said the effectiveness of the recent repo rate hike in containing second-round inflationary effects would depend on the RBI’s active liquidity management. The review said that food supply management, global energy volatility and system liquidity conditions would shape near-term price trends.

At its October Monetary Policy Committee meeting, the RBI raised the repo rate by 25 basis points to 5.5 percent, marking the first increase in nearly four years. The central bank also shifted its stance from neutral to calibrated tightening.

Headline retail inflation rose by 71 basis points to 5.54 percent in September, driven by a 7.74 percent rise in food prices and the partial pass-through of higher global fuel costs. The Ministry said that India’s financial sector remains largely sound and resilient despite rising global sovereign bond yields and volatile equity markets.

According to the review, money-market transmission remained orderly, with market rates staying close to the policy repo rate, while surplus liquidity was effectively managed through fully subscribed OMO sales. Overall bank credit growth was 21.6 percent year on year, while credit to industry alone rose by 18.2 percent.

Confidence in growth, industry and the external sector, but risks remain

The Ministry struck a relatively confident tone on growth. Following 7.8 percent expansion in the first quarter, its nowcasting model estimates growth of 7.35 percent in the second quarter of FY 2027.

Several international agencies and credit rating agencies have raised their growth forecasts for India. The IMF has set its FY 2027 forecast for India at 7 percent, while the World Bank, OECD and RBI project growth of 7.1 percent. However, the IMF says global growth will slow to 3.1 percent in 2026.

Industrial activity has also remained strong. The Index of Industrial Production rose by 8 percent in August, with manufacturing up 9 percent, while the HSBC Manufacturing PMI increased from 52.8 to 55.1 in September.

In the external sector, merchandise exports rose by 23.1 percent in September, supported by electronics and engineering goods, although the current account deficit widened during April–August. Strong banking capital flows kept the balance of payments in surplus, and foreign exchange reserves stood at $721 billion as of October 16, equivalent to 10.3 months of import cover.

Despite this, the Ministry acknowledged that the rupee remains under pressure. The review said that a strengthening El Niño could affect soil moisture during the rabi sowing season, while festive-season demand, high crude oil prices and freight disruptions along West Asian routes could push up input costs.

According to the Ministry, the RBI’s steps to provide dollars directly to public-sector oil marketing companies and curb currency speculation could help ease exchange-rate volatility to some extent. The review concluded that strong domestic demand, sustained investment activity, a resilient financial sector and active supply-side management have so far supported India’s growth prospects, although considerable uncertainties remain.

Our previous report discussed the IMF’s October World Economic Outlook forecast for India’s FY27 growth, which was raised to 7%, with growth also expected to remain at 7% in FY28. It highlighted risks such as potential pressure on inflation and the current account deficit, alongside strong domestic demand despite higher crude oil prices.

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