Taking guard: On the RBI and growth concerns

The central bank’s price worries may be warranted but growth concerns are emerging

In a 5:1 majority verdict, the Reserve Bank of India’s Monetary Policy Committee (MPC), last week, decided to hold benchmark interest rate at 6.50%, the same level it has been since April 2023. One of the three newly inducted external members in the panel pushed for a 25 basis points (0.25 percentage points) rate cut, perhaps citing the decline in the headline inflation rate below the RBI’s median target of 4% in July and August. However, the MPC termed this downward trajectory of inflation as slow and uneven, and expected this moderation to reverse from September, as it has, to hit a nine-month high of 5.5%. The panel has not altered its 4.5% projection for retail inflation and its GDP growth estimate of 7.2% through 2024-25, but has reworked the math. In the second quarter or Q2, it expected inflation to average 4.1% instead of 4.4%, but the September number takes it over 4.2%. In Q3, inflation is now expected to average higher at 4.8% from the MPC’s August estimate of 4.7%, before easing to 4.2% between January and March 2025. While the MPC has unanimously agreed on switching the monetary policy’s hawkish stance to ‘neutral’, going by these numbers, hopes of a rate cut at the next policy review in December remain slim, especially as the panel has reiterated that it remains “unambiguously” focused on durably aligning inflation to the 4% mark.

While food inflation remains a worry, with vegetable prices spiking again, the central bank Governor Shaktikanta Das has also flagged that core inflation (excluding food and energy costs) has bottomed out. Global oil and metal prices are fresh headaches to fret about, along with the ever-looming threat of climate shocks. Perhaps, if these risks remain only on paper, it is plausible to expect a rate cut in February. It is instructive that the RBI Governor only made a tangential reference to the US Federal Reserve’s slashing of interest rates by a sharp 50 basis points last month as a “policy pivot”, indicating that domestic trends will determine the bank’s approach. But with the European Central Bank likely to cut interest rates too, and U.S. inflation dropping to a three-year low, prompting talk of another rate cut soon, the RBI may have to act faster. Notably, though it remains more bullish than most agencies on India’s growth trajectory, there are clear signs of a cooling in economic activity in the first half of this year, with stuttering car sales reflecting weaker urban consumption and industrial output slipping into contraction in August. If the tide does not turn on this front, the MPC, that has vowed to keep supporting growth while reining in inflation, could have an unenviable dilemma on its hands in the coming months.

Published - October 15, 2024 12:26 am IST