The committee’s decision to keep interest rates unchanged rests on its view that even as the economy slowed down in the second quarter, the outlook for growth is “resilient”.
Dec 7, 2024 02:30 IST First published on: Dec 7, 2024 at 02:30 IST
In the run-up to the December meeting of the monetary policy committee, there was a debate over whether the sharp deceleration in growth should prompt a cut in interest rates, even as inflation remained above the upper threshold of the RBI’s inflation targeting framework. The MPC, however, continued to attach primacy to inflation concerns. Resisting pressure from the government and the clamour for lower rates from sections of the market, it maintained the status quo, though two external members on the committee voted for a cut. The repo rate stands at 6.5 per cent. Alongside, 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 rests on its view that even as the economy slowed down in the second quarter, the outlook for growth is “resilient”. That even as GDP growth declined to a multi-quarter low of 5.4 per cent, against the RBI’s projection of 7 per cent, the momentum has picked up in the second half of the year. Das noted that high-frequency indicators indicate that the economic momentum has “recovered, aided by strong festive demand and pick up in rural activities”. In other words, the central bank expects the slowdown to be transitory — it has projected GDP growth to bounce back to 6.8 per cent in the third quarter, and to 7.2 per cent in the fourth quarter. The central bank has, however, announced a cut in the cash reserve ratio which would increase the lendable resources of the banking system, supporting growth. On inflation, the RBI remains cautious. It expects food price pressures to continue in the third quarter, to ease only towards the end of the year. The moderation is expected to be “backed by seasonal correction in vegetable prices, kharif harvest arrivals, likely good rabi output and adequate cereal buffer stocks”. Retail inflation has now been pegged at 5.7 per cent in the third quarter, falling to 4.5 per cent in the fourth quarter. The central bank has now projected alignment with the 4 per cent 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, have raised volatility. Global markets are now awaiting Trump’s first policy steps after his inauguration on January 20 next year. On the domestic front, the Union budget will be tabled in Parliament on February 1, providing clarity on the stance of fiscal policy. The monetary policy committee is scheduled to meet a few days thereafter. By then, uncertainty over the trajectory of food prices should have also dissipated. If inflation trends in line with the central bank’s expectations, it could then open the door to policy easing.
