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Informist, Friday, Dec. 6, 2024

By Siddharth Upasani

MUMBAI – It has taken just two months for India's growth-inflation balance to go from "well-poised" to "unsettled".

After weakness in several high-frequency numbers was batted away by the Reserve Bank of India in October as a reflection of a "mixed" picture of the economy where the positives outweighed the negative, GDP growth sliding to a seven-quarter low of 5.4% in Jul-Sept was a more difficult bouncer to duck. This has led to the full-year growth forecast of the central bank being cut by 60 basis points to 6.6%, close to the lower end of the finance ministry's own projection of 6.5-7.0%.

The RBI's bullishness about India's growth trajectory over the last couple of years has been noteworthy. In December 2023, it had predicted that GDP growth in 2023-24 (Apr-Mar) would be 7.0%, which economists thought was perhaps a tad optimistic. As it turned out, RBI was being conservative, with growth for the full year a scarcely believable 8.2%. The situation could not be more different now: after raising its forecast by 20 bps to 7.2% in June, the central bank has now had to make a sharp downward revision.

Economic forecasting, for sure, is fraught with risks and is difficult at the best of times. The post-pandemic period has seen unusual patterns in data, making the job of forecasters even more challenging. The problem, however, is that the RBI's optimism on growth has stood out very sharply even as economists from outside the central bank--who don't have to err on the side of caution as they don't bear the burden of policymaking--have warned a slowdown is upon us.

The RBI's rosy growth outlook allowed the Monetary Policy Committee to retain the repo rate at 6.50% for the better part of two years and afforded it the room to bring down inflation to its target. Had the central bank's growth forecasts not been what they were, pressure to lower interest rates would have started to pile up much earlier than October.

Even now, the RBI's commentary on growth is a bit unsettling. For one, Governor Shaktikanta Das in his address Friday termed the latest growth print as an "aberration". Second, the MPC thinks the growth outlook is "resilient", Das further said, although the committee's resolution itself does not say so. Finally, the revised forecast for FY25 is still well above what several non-RBI economists expect: Nomura and Emkay Global Financial Services are at 6.0%, Kotak Mahindra Bank at 6.1%, and State Bank of India at 6.3%, to name a few.

Interestingly, it is the RBI representatives on the MPC that seem to be behind the curve, with two external members voting for a 25 bps reduction in the repo rate on Friday--the same as in August and up from just Nagesh Kumar in October.

Monetary policy must be forward-looking. But by visibly reacting to the Jul-Sept growth number--which is old data--the RBI has admitted it was wrong on growth to some extent. The issue is that the central bank's forward-looking numbers do not inspire confidence either. And if the MPC continues to make its interest rate decisions on the basis of these forecasts, which seem to be presenting a glass-half-full picture rather than a glass-half-empty one, it may have to amplify the size of its actions so that it catches up to the curve.  End

Edited by Ashish Shirke

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