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Informist, Friday, Feb. 7, 2025

 

By Siddharth Upasani

 

MUMBAI – After maintaining status quo for two full years, the Reserve Bank of India's Monetary Policy Committee on Friday finally reduced the repo rate, bringing it down by 25 basis points to 6.25%. It is also the first rate cut by the central bank since the emergency out-of-schedule meeting of May 22, 2020, when it lowered the policy rate to 4.00% in the first few weeks of the COVID-19 pandemic.

 

The near-five-year wait should have been much shorter, if one goes by the market's repeated assertions that the MPC has been behind the curve. But the committee voting unanimously for a rate cut on Friday is reflective of the urgency to boost growth, although the RBI continues to be more optimistic than others, with its GDP growth forecast of 6.7% for 2025-26 (Apr-Mar) close to the upper-end of the government's projection of 6.3-6.8%. Growth in FY25, as per the first advance estimate, is seen at a four-year low of 6.4% and could even be revised lower in the coming months.

 

The Economic Survey and the FY26 Union Budget served multiple warnings on the growth front, with the latter's income tax rate and slab changes at the cost of INR 1 trillion to the exchequer being the most explicit of them all. The Survey was even sombre, saying India had to "raise its game" when it came to growth. The private sector was criticised for not investing enough in research and development and not aligning wage growth with increases in profits. The two growing in tandem, according to Chief Economic Adviser V. Anantha Nageswaran, is essential for sustaining demand and corporate revenues in the medium to long run.

 

Days after the Budget's presentation, the RBI has begun to do its bit to support growth even as it maintains a certain degree of optimism. "Going forward, improving employment conditions, tax relief in the Union Budget, and moderating inflation, together with healthy agricultural activity bode well for household consumption. Government consumption expenditure is expected to remain modest. Higher capacity utilisation levels, robust business expectations and government policy support augur well for growth in fixed investment. Continued buoyancy in services exports will support growth," Governor Sanjay Malhotra said in his statement Friday.

 

To be sure, Malhotra as well as the MPC's resolution listed risks to India's growth too. However, they were outnumbered by the supporting forces. Moreover, the central bank sees risks to growth largely emanating from the external sector.

 

As an institution, the RBI cannot engage in fear-mongering. However, it speaks volumes when the finance ministry's Economic Survey sounds grimmer about the future than the more staid and conservative economists and researchers of Mint Street. Of course, it is possible the RBI's insights show no large cause for concern, but its recent track record is questionable given its GDP growth forecast of 7.0% for FY25, which was initially raised to 7.2% and subsequently cut to 6.6%, missed the first advance estimate of 6.4%. And economists see even that figure being revised downwards in the coming months. It is no surprise, then, that Malhotra said in his statement that the RBI will look to improve its forecasting of key macroeconomic variables and develop "more robust models".

 

Just two months ago, only two members of the MPC had favoured a rate cut; now, it is all six. And the only meaningful new pieces of data since then have been two sets of CPI numbers that show headline retail inflation has declined by nearly a full percentage point to 5.22% from 6.21% in October, while the most forward-looking inflation forecasts remain at or just below the medium-term target of 4%. The RBI and the MPC may not be openly pressing the panic button when it comes to growth, but their unanimous decision to lower interest rates suggests there is more than meets the eye.  End

 

Edited by Ashish Shirke

 

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