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Informist, Friday, Dec. 6, 2024

By Shubham Rana

NEW DELHI – Heading into the December meeting, the Reserve Bank of India's Monetary Policy Committee was faced with one of worst growth-inflation dynamics in recent times. With GDP growth tanking in Jul-Sept and inflation above 6%, the committee was under pressure to lower the repo rate for the first time in four-and-a-half years. What markets got instead was a cut in the Cash Reserve Ratio, with the policy repo rate left unchanged at 6.50% for the 11th consecutive meeting.

To be sure, two of the committee members--Nagesh Kumar and Ram Singh--voted in favour of a 25-basis-point repo rate cut. But the majority, which includes three representatives from the RBI, seem to want more credible evidence for a 'well-timed' rate action.

The CRR cut comes two months after the MPC loosened its policy stance to neutral and will release about INR 1.16 trillion into a banking system that has seen conditions tighten in recent weeks. The RBI, clearly, does not want to lower the repo rate when liquidity conditions are not conducive for quick transmission by banks.

"Supporting liquidity ahead of any repo rate cut is the right sequencing of the policy measures for effective transmission," said Anubhuti Sahay, head of India Economic Research at Standard Chartered. According to Madhavi Arora, chief economist at Emkay Global Financial Services, the policy trade-off facing the RBI is such that the CRR cut was the "least-costly" action the central bank could take.

GETTING PROJECTIONS WRONG

Forecasts within and out of the RBI have found it difficult to predict growth and inflation numbers in recent months, with most of them missing the Jul-Sept GDP number and the September and October CPI inflation prints by wide margins. On Friday, the RBI took cognisance of its errors, lowering its 2024-25 (Apr-Mar) growth view sharply by 60 basis points to 6.6% and raising the inflation forecast by 30 bps to 4.8%.

For the RBI, growth and inflation are closely linked. While Governor Shaktikanta Das said in his address Friday that "price stability is essential for sustained growth", Deputy Governor Michael Patra blamed the slowdown on inflation. Both also remain fairly positive about the future, refusing to judge trend growth on the basis of just one GDP number and pointing to an expected revival in economic activity in the second half of FY25.

Economists, however, are not convinced.

"Our view remains that the growth glass is half empty, not half full and the recent sharp slump in GDP growth should have highlighted the higher growth sacrifice involved in keeping policy rates elevated. Meanwhile, the inflation increase is concentrated primarily in a few food items and underlying inflation continues to remain subdued," said Aurodeep Nandi, India economist at Nomura.

ROAD AHEAD

Das repeatedly said on Friday that rate actions have to be appropriately timed and the RBI requires better visibility on the growth and inflation outlook. He also said if the growth slowdown lingers beyond a point, "policy support" might be needed.

"It is a question of timing," Das told reporters at the post-policy press conference. "They (actions) have to be timed in a manner keeping the outlook in mind and also action has to be taken when it is really going to be most effective and impactful."

Economists have interpreted the RBI and MPC's actions Friday to mean the repo rate may finally be reduced in February. "Going forward, as the worst of quarterly growth reading and peak inflation seem to be behind us, we expect the MPC to derive comfort from the same and commence rate easing from February, cutting the policy repo rate by 25 bps, as inflation moderates closer to target and growth may still fall short of the MPC's forecast," Barclays' economists said in a report.

At its next meeting, the MPC will have plenty of new numbers to weigh up: CPI data for November and December, the first advance estimate of GDP for FY25, and the government's Budget estimates for FY26. What it will not have is the GDP growth number for Oct-Dec, which will be released at the end of February.  End

Edited by Akul Nishant Akhoury

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