In her first major interview since assuming office eight months ago, Reserve Bank of India (RBI) Deputy Governor Poonam Gupta has projected a robust and optimistic outlook for the Indian economy. She attributes this strength to a cumulative effect of structural reforms and inherent economic buffers, suggesting that growth could easily hover between 7% and 7.5% in the coming years with limited downside risks.
Growth Engine Firing on All Cylinders
Gupta drew a parallel between India's current position and the high-growth phase experienced by East Asian economies. She highlighted the nation's unique advantages: a large domestic consumption base and a diversified economic structure, which reduce dependency on any single sector.
Breaking down the sectors, she noted that agriculture is becoming more resilient due to mechanisation and diversification. Manufacturing is growing at a healthy 7-8%, while the services sector, where India is a global leader, remains the largest and fastest-growing. "Reforms have picked up pace in recent years and have now cumulated to a point where they can deliver even stronger growth outcomes," Gupta stated, explaining the economy's resilience despite a 50% US tariff shock and global uncertainty.
Inflation Trending Lower, Policy Stance Flexible
On the inflation front, the Deputy Governor presented a reassuring picture. As India completes a decade of inflation targeting, she pointed out that inflation has not only declined on average but also become less volatile. The RBI's forecast for 2025-26 stands at 2%, the lower end of the tolerance band.
Regarding the interest rate cycle, Gupta noted that the Monetary Policy Committee (MPC) has already reduced the policy rate by 125 basis points in less than a year. While significant action has already been taken, the current neutral stance provides flexibility for further moves based on incoming data, should the benign inflation outlook persist.
Rupee Movement and External Resilience
Addressing concerns about forex volatility, Gupta asserted that India's external position remains resilient. The current account deficit (CAD) for this year is estimated at a sustainable 1-1.2% of GDP, well below the 2-3% considered manageable for a fast-growing economy like India's.
She contextualised the rupee's recent depreciation, noting that the average annual depreciation over the past decade is about 3%. This year's slide of around 4.5% is within historical variations. Gupta emphasised that the inflation pass-through from such depreciation is likely to be "very mild" and could even act as an automatic stabiliser for the economy.
Capacity for Expansion and FTAs as Buffers
Gupta highlighted the existence of slack in the economy, with capacity utilisation around 74%. This, coupled with more nimble production processes in services and manufacturing, allows strong growth to coexist with moderate inflation, indicating no immediate overheating risks.
She views the Free Trade Agreements (FTAs) being signed by India as critical for building economic buffers and speeding prosperity. "Opening more external markets will help," she said, adding that this diversification will cushion the economy against external shocks and potentially spur investment by better utilising existing capacity.
On Data Revisions and Inflation Targeting Framework
The Deputy Governor welcomed the upcoming revision of economic data series by the Ministry of Statistics and Programme Implementation (MoSPI). A likely reduction in the weight of food in the Consumer Price Index (CPI) basket, particularly volatile items, could lead to a more stable inflation series, smoothing policymaking.
On the debate around RBI's inflation targeting framework, Gupta clarified that a recent consultative discussion paper revealed majority support for retaining the 4% headline inflation target. She also noted a global consensus among central banks to stick with a single mandate of price stability, as tools like policy rates are not well-suited to target multiple objectives like employment.
In conclusion, Poonam Gupta's assessment paints a picture of an Indian economy at an inflection point, with strong fundamentals, effective reforms, and prudent policy setting the stage for an accelerated and sustained growth take-off in the years to come.
