The Reserve Bank of India (RBI)-led Monetary Policy Committee (MPC) will unveil its bi-monthly policy decisions on December 6. The three-day meeting, which began on December 4, is being closely watched. For the first time in more than 30 months, MPC will probably be devoting more time to faltering economic growth. The central bank seeks to balance fostering economic growth with managing inflation. The focus once again is on the repo rate which has been steady at 6.5 per cent for the past nine MPC meetings and the status quo may continue for some more time, as an immediate rate cut may not be easy for the MPC to justify.
The central bank has kept the policy rates untouched at 6.5 per cent over the last ten meetings. RBI has been more hawkish on its outlook on inflation due to very high food inflation which has not got successfully anchored. This reflects the RBI’s cautious stance as it navigates between fostering growth and controlling inflation. Even as inflation is likely to ease by the end of March 2025 (led by easing food), it is far from the 4 per cent durability the RBI has been seeking in order to avoid any feedback loop to generalised inflation. The recent RBI commentary has been assertive on this front, albeit with a presumption that growth is robust.
The RBI will aim for sustainable control without compromising economic progress. India’s GDP growth slowed to 5.4 per cent in the second quarter of FY25, marking the weakest performance in seven quarters. Manufacturing grew just 2.2 per cent, while consumption and private investment weakened. Although agriculture showed a 3.5 per cent growth, overall economic activity remains under pressure. The sharp slowdown has raised questions about whether the RBI’s current policy is sufficiently supportive of growth. Although India’s GDP shows resilience, the policy balance between growth and inflation will be crucial and a ‘neutral’ stance would reflect a balanced economic approach.
The outcome of the MPC meeting will be closely watched by markets and analysts, as it will provide further guidance on the RBI’s approach to managing the complex dynamics of growth and inflation. During the last meeting, the RBI kept the repo rate at 6.5 per cent and shifted its stance to “neutral.” Repo rate is a key factor in determining loan rates. The repo rate, set by the RBI, is the interest rate at which commercial banks borrow money from the central bank. A lower repo rate reduces the cost of borrowing for banks, encouraging investment in the country. On the other hand, a higher repo rate increases borrowing costs, leading to lower investment. So it looks like an immediate rate cut may not be on the cards.
