India's economic sweet spot appears to be getting harder to sustain. For much of the past year, the country enjoyed what economists often describe as a Goldilocks moment: growth was strong and inflation was comfortably under control, meaning financial stability remained intact. The Reserve Bank of India's (RBI's) June monetary policy review suggests that this balance is beginning to shift. Faced with the inflationary consequences of the prolonged West Asia conflict, elevated crude oil prices and weather-related risks, the RBI has raised its inflation forecast and lowered its growth projections. That can be called a Goldilocks reversal.
Yet the central bank's message is far from pessimistic. While acknowledging that external shocks are making the economic environment more difficult, the RBI believes India's domestic fundamentals remain strong enough to cushion the blow.
