December 7, 2024 02:30 IST
First published: December 7, 2024 at 02:30 IST
At the December meeting of the Monetary Policy Committee, there was a debate over whether a sharp decline in growth would warrant a cut in interest rates even as inflation remained at the upper threshold of the RBI’s inflation targeting framework. However, the MPC continued to prioritize inflation concerns. Resisting government pressure and clamor for lower rates from segments of the market, the committee maintained the status quo even though two external members voted in favor of cuts. Repo rate is 6.5 percent. Also, the MPC chose to continue with its neutral policy stance. As RBI Governor Shaktikanta Das reiterated, “Price stability is essential for sustained growth.”
The committee’s decision to keep interest rates unchanged is based on its view that the growth outlook remains ‘resilient’ even as the economy slowed in the second quarter. GDP growth slowed to a multi-quarter low of 5.4 percent, compared to the Reserve Bank’s forecast of 7 percent, but picked up pace in the second half of the year. Das noted that high-frequency indicators suggest economic momentum has “recovered, with strong festive demand and an increase in rural activities”. In other words, the central bank expects the slowdown to be temporary – it forecasts GDP growth to bounce back to 6.8 percent in the third quarter and 7.2 percent in the fourth quarter. However, the central bank has announced a reduction in the cash reserve ratio, which will increase the lending resources of the banking system and support growth. On inflation, RBI remains cautious. It expects food price pressures to continue in the third quarter, only to ease towards the end of the year. This moderation is expected to be supported by “seasonal improvement in vegetable prices, arrival of kharif crop, likely good rabi yield and adequate grain buffer stocks”. Retail inflation stood at 5.7 percent in the third quarter after falling to 4.5 percent in the fourth quarter. The central bank has now forecasted that it will align with the 4 percent target in the second quarter of the next financial year.
But in an increasingly uncertain global environment, policy choices are not straightforward. The election of Donald Trump, and the consequent threat of tariffs, has increased volatility. World markets are now awaiting Trump’s first policy moves since his inauguration on January 20 next year. On the domestic front, the federal budget will be tabled in Parliament on February 1, providing clarity on the fiscal policy stance. A few days later, the meeting of the Monetary Policy Committee will be held. By then, the uncertainty in the movement of food prices should also have disappeared. If inflation trends are in line with the central bank’s expectations, this could open the door to policy easing.