Content

1. RBI maintains status quo, conserves policy ammunition
2. Anthropic sends a message to Bengaluru: AI and India’s IT services model

RBI maintains status quo, conserves policy ammunition

Monetary Policy & Legal Framework

Institutional Basis

• Reserve Bank of India (RBI) operates under RBI Act, 1934; Monetary Policy Committee (MPC) created via 2016 amendment, institutionalising flexible inflation targeting and rule-based monetary policy.
• MPC consists of 6 members (3 RBI + 3 Government nominees); decisions by majority vote with Governor’s casting vote, ensuring institutional balance between autonomy and accountability.
• India follows Flexible Inflation Targeting (FIT) with mandated CPI target 4% ±2% band (2–6%), notified by Government under Section 45ZA of RBI Act.

Relevance

GS 3 – Economy

• Monetary policy, inflation targeting, interest rates, liquidity management, capital flows, exchange rate stability.
• Growth–inflation trade-off, real interest rates, and macroeconomic stabilisation.
• Role of central banks in managing global spillovers and commodity shocks.

Practice Question

• “In an uncertain global environment, central banks often prioritise policy credibility over short-term growth stimulus.”Discuss in the context of RBI’s recent status quo on policy rates.(250 Words)

Current Policy Stance

Status Quo Decision

• RBI kept policy repo rate unchanged at 5.25% (Feb 2026), continuing pause since Feb 2023, indicating cautious approach amid global uncertainty and evolving inflation-growth dynamics.
• Decision reflects strategy to preserve policy space (“policy ammunition”), allowing future rate actions if inflationary or growth shocks emerge domestically or globally.
• RBI assessment suggests inflation trajectory becoming manageable, reducing urgency for immediate rate cuts while ensuring credibility of inflation targeting framework.

Inflation Dynamics

Price Stability Context

• CPI inflation projected ~4% for FY27, aligning with RBI’s medium-term target, signalling relative price stability compared to post-pandemic and Ukraine-war driven inflation spikes.
• Core inflation softening indicates easing demand-side pressures, while food inflation volatility remains key risk due to climate variability and supply-side shocks.
• Stable inflation expectations strengthen real interest rate transmission, supporting macroeconomic credibility and currency stability.

Growth Outlook

GDP Projections

• RBI projects GDP growth ~7.2% for FY27, reflecting India’s position as fastest-growing major economy, supported by domestic demand, capex push, and services sector resilience.
• Lower global crude and commodity prices reduce imported inflation and input costs, improving corporate margins and household purchasing power.
• Potential improvement in capital flows expected if advanced economies like US and EU witness monetary easing cycles.

Liquidity & Financial Conditions

Liquidity Management

• RBI previously infused liquidity through CRR adjustments and OMOs, ensuring adequate system liquidity to support credit growth and financial stability.
• Despite earlier liquidity support, RBI remains cautious as excessive liquidity can rekindle inflationary pressures and asset price bubbles.
• Balancing liquidity with price stability reflects calibrated monetary management in uncertain global macroeconomic environment.

External Sector Considerations

Global Linkages

• US tariff policies and global trade uncertainty affect export outlook, though diversified export basket reduces concentrated vulnerability.
• Narrower interest rate differentials with US could influence capital flows and exchange rate stability, shaping RBI’s cautious stance.
• India’s strong forex reserves (historically above USD 600 billion range) provide buffer against external volatility.

Governance & Economic Significance

Policy Credibility

• Maintaining status quo signals policy predictability, anchoring investor confidence and financial market stability.
• Conservative approach protects against premature easing that may destabilise inflation expectations.
• Reinforces RBI’s reputation as credible inflation-targeting central bank among emerging markets.

Challenges & Risks

Structural Concerns

• Food inflation vulnerability due to monsoon variability and climate shocks remains persistent structural risk.
• Global financial volatility, geopolitical tensions, and commodity price swings could disrupt inflation trajectory.
• Tight policy for prolonged period may moderate private investment and consumption momentum.

Way Forward

Policy Priorities

• Maintain data-dependent monetary policy, avoiding rigid forward guidance amid volatile global macroeconomic environment.
• Strengthen supply-side measures in food management to reduce structural inflation drivers beyond monetary control.
• Improve monetary-fiscal coordination to ensure fiscal deficits do not counteract disinflation efforts.
• Deepen financial markets to enhance smoother transmission of policy rates.

Anthropic sends a message to Bengaluru: AI and India’s IT services model

Technological & Policy Context

AI Disruption Basics

• Rapid advances in Generative AI (GenAI) are shifting software work from human-coded solutions toward AI-assisted and AI-generated outputs, challenging traditional labour-intensive IT services models.
• Firms like Anthropic and OpenAI demonstrate AI systems capable of coding, legal review, workflow planning, and analytics, expanding AI from assistance to partial task substitution in knowledge industries.
• India’s IT sector, built on outsourcing, cost arbitrage, and skilled manpower, now faces structural disruption as AI reduces need for large coding and support teams.
• Shift marks transition from “services-led digital economy” to “AI-augmented knowledge economy”, demanding policy and workforce adaptation.

Relevance

GS 3 – Economy & S&T

• AI-led productivity shifts, automation, and digital economy transformation.
• Impact on IT exports, employment, and business models.
• Innovation ecosystem, R&D, and strategic technology capacity.

Practice Question

• “Generative AI may do to IT services what automation did to manufacturing.”Discuss implications for India’s growth and employment model.(250 Words)

Economic Significance

Growth Model Implications

• India’s IT-BPM sector contributes ~7–8% of GDP and over USD 200+ billion exports annually, making AI disruption macroeconomically significant for growth, forex, and employment.
• AI-driven automation may compress billing-hour models, pushing firms toward outcome-based pricing and high-value consulting rather than routine services.
• Productivity gains from AI can improve margins but may reduce entry-level hiring, affecting India’s demographic dividend utilisation.
• Stock market reactions, such as IT index declines, reflect investor concerns about medium-term revenue models and competitiveness.

Employment & Social Dimensions

Workforce Impact

• Routine coding, testing, and documentation roles face higher automation risk, especially entry-level positions forming bulk of Indian IT recruitment pipelines.
• However, AI creates demand for AI trainers, prompt engineers, data curators, and domain specialists, shifting skill composition rather than eliminating jobs entirely.
• Risk of job polarisation—high-skill AI roles grow while mid-skill routine jobs shrink—raising inequality and reskilling urgency.
• Large-scale reskilling aligns with NEP 2020 emphasis on digital and future skills.

Governance & Regulatory Relevance

Policy Interface

• India’s approach under Digital India and IndiaAI Mission seeks to build domestic AI capability, compute infrastructure, and datasets for strategic autonomy.
• Need for regulatory clarity on AI ethics, liability, and data protection under frameworks like Digital Personal Data Protection Act, 2023.
• Government role shifts toward enabler and regulator, ensuring innovation without harming employment stability or data sovereignty.

Strategic & Global Dimensions

Competitive Positioning

• Global AI race led by US and China may reshape digital value chains; India must avoid being confined to low-value segments.
• Opportunity to position India as hub for responsible AI, multilingual AI, and Global South solutions, leveraging large digital public infrastructure.
• AI capability increasingly linked with national power, productivity, and strategic autonomy.

Challenges & Risks

Structural Concerns

• Skill mismatch between current workforce and AI-driven demand may create short-term unemployment pressures.
• High dependence on foreign AI models risks technological dependence and data colonialism.
• SMEs may struggle to invest in AI adoption, widening digital divide within industry.
• Ethical concerns over algorithmic bias, surveillance, and accountability remain unresolved.

Way Forward

Reform Directions

• Scale up AI-focused skilling programs, integrating coding, statistics, and domain expertise through industry–academia collaboration.
• Incentivise R&D, domestic AI startups, and compute infrastructure to reduce import dependence.
• Promote human-in-the-loop AI systems ensuring augmentation rather than full automation.
• Develop clear AI governance framework balancing innovation, ethics, and labour transition support.