The RBI Monetary Policy Review

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

The Reserve Bank of India has finally scaled down the rate of growth of India’s GDP for the year 2024-25 from 7.0 percent to 6.6 percent. This is in tune with the Ministry of Statistics and Programme Implementation (MOSPI)’s recent estimate of Q2 GDP and general downgrading by the World Bank and IMF to 7.0 percent and the Economic Times poll to 6.8 percent. However, the RBI appears to be still hopeful about an economic turnaround in the third and fourth quarters of the current year. The RBI did not say anything about the Q2 GDP but marginally downsized the Q3 GDP from its earlier projection of 7.4 percent to 6.8 percent and the Q4 GDP to 7.2 percent from 7.4 percent. For this decision, the RBI is banking on the prevailing impression about the performance of the high-frequency macroeconomic indicators, which, according to them, have “recovered aided by strong festive demand and pick up in rural activities.” There has been a tendency in recent times to show that the recent slowdown of the economy is mainly due to stagnancy in urban consumption expenditure. But the question arises: Can only urban slowdown impact the GDP to the extent that we have seen in Q2? The available facts show a different scenario. Food inflation as a whole was declining in August 2024 to 5.66 percent. Moreover, the general inflation rates in rural areas were 6.02 percent, while in urban areas it was 4.99 percent as estimated by the MOSPI. The RBI also estimated the GDP growth rate for the first quarter of the next year (FY 25) at 6.9 percent.

The RBI Monetary Policy Committee (MPC) met on December 6 to decide about its 5th bimonthly monetary policy for FY 25. The meeting indeed had a tough time in choosing between growth and inflation—the two burning issues on its agenda. The MPC wanted to make a balance between the two, but that did not happen, and finally they have chosen to manage inflation before the growth. The first change that the meeting decided to make in the monetary policy is to cut the cash reserve ratio (CRR) from the present 4.5 percent to 4.0 percent. This is the first time in a 30-month period that the RBI chose to cut the CRR and ease the pressure on the money market to some extent. This cut will enable the banks to have more liquidity in their hands to lend to the deserving for economic growth. This may also lead to lowering the interest rates by the banks to attract the lending. As per the RBI, this cut will pump as much as Rs 1.16 lakh crore into the banking system, which will find a way to the lender. Evidently this move will indirectly add to the already inflation-prone economy.

The apex bank might have thought that by the time the money comes to the market through the lenders, more than two to three months will elapse, and by that time the food inflation will stabilize. In fact, by that time the kharif crops will start coming to market, and also the good rabi output will enable the market to make seasonal corrections. The bank’s expectation is that the retail inflation will continue to irritate the market through the third quarter, and it estimated the inflation at the level of 5.7 percent, marginally lower than the RBI’s set comfortable limit of 6 percent. But the RBI also expected that the inflation would go further down to the 4.0 percent level, which is a difficult proposition and may not materialize at all. Because the fourth quarter will be marked by hectic economic activities this year—mainly because the year closing did not materialize properly last year due to general elections and secondly because of the budget, which will be presented in the later part of February. This will further push the prices upward, inevitably generating more inflation. The year FY 26 therefore will start with a not-so-good note. RBI also revised the estimated rate of inflation for FY 25 to 4.8 percent from 4.5 percent and for the fourth quarter from 4.2 to 4.5 percent. Considering the present status of the inflation (where the year-on-year inflation rate is 6.21 percent based on the consumer price index for October, 2024, and food price inflation is at 10.87 percent based on the consumer food price index), and the high rising food prices, this expectation may not be achieved.

The RBI appears to be determined to maintain a strict monetary policy for the coming months, as it did not change the repo rate despite the fact that there was a strong expectation from the part of the government and also the banking sector that the repo rate reduction will be on the agenda this time. Two members of the MPC also advocated the cut in the repo rate, but the remaining four members, including the Governor, advocated a status quo. Thus, the repo rate remained fixed at 6.50 percent since it was last increased from 6.25 percent in June 2022—i.e., about 30 months back. A cut in the repo rate by at least 50 basis points would have helped the RBI to follow a liberal monetary policy. But the MPC preferred to remain conservative in this count and decided not to take this path for growth. The MPC also decided to keep the standing deposit facility (SDF) rate unchanged at 6.25 percent while the marginal standing facility (MSF) and bank rate are at the current standard of 6.75 percent. As a whole, the policy stance remained at “neutral.

Recently the finance minister has come up with her view that the present slowdown as worked out by the MOSPI is not systemic; rather, this is due to inadequate government spending on investment and low public spending on consumption during the first quarter, which was due to the preoccupation of general elections to the Lok Sabha. She expects that the economy will quickly catch up with the rate in the third quarter and will compensate for the loss. This is intriguing as her comments came at a time when the RBI has already downgraded the growth percentage.