Reserve Bank of India (RBI) Governor Shaktikanta Das.FILE | PTI
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Despite the disappointing slump in economic growth, the RBI on Friday left the benchmark policy repo rate unchanged at 6.5 percent amid inflationary pressures. Maintaining a firm stance on inflation control, Governor Shaktikanta Das stressed that the central bank needed “more credible evidence” on the disinflationary process, which he said was getting prolonged and arduous.
As Das rightly noted, there is no scope for knee-jerk reactions in central banking, which is why the RBI sat on its hands notwithstanding the GDP shocker, where growth slowed to a 7-quarter low of 5.4 percent in Q2 while the headline inflation for October printed at a 14-month high of 6.21 percent.
This fatal combination is what economists dread the most. Though some of them fear the Indian economy is already surviving a stagflation, the RBI insists otherwise, stating that its policy actions will be well-timed with the growth and inflation outlooks in mind.
While the RBI’s stated policy of durable price stability as a foundation for high growth is welcome, the sharper-than-expected moderation in growth has sparked concerns about whether the central bank is waiting too long to bite the bullet.
As Deputy Governor Michael Patra explained, the growth slowdown is due to both demand- (investment) and supply-side (manufacturing) factors that are integrated—the slump in sales is a drag on both manufacturing output and investments. But the RBI is certain that the slowdown has bottomed out.
Taking note of the recent aberrations in inflation and growth, it revised 2024-25’s real GDP growth projection down to 6.6 per cent from 7.2 percent and the inflation forecast up to 4.8 percent from 4.5 per cent. The good news, though, is that the RBI has cut the cash reserve ratio by 50 basis points to infuse about Rs 1.2 lakh crore of liquidity into the banking system. This, in turn, could spur growth and reduce interest rates.
The art of setting interest rates is to be ahead of the game—to raise rates before inflationary pressures seep in and to cut them before the economy weakens too much. Das, on his part, maintains that a rate cut at this stage would be “very risky” and that he is in no hurry to join the chorus of global cuts. While rate revisions may continue to be a tricky call, the central bank must restore the balance between inflation and growth.
