The Reserve Bank of India’s (RBI) external monetary policy committee (MPC) members—Nagesh Kumar and Ram Singh—voted for a 25 basis points (bps) repo rate cut citing faltering growth and rising inflation trajectory in the country, according to minutes of the last RBI MPC released today.
“The MPC’s mandate is to ensure price stability while supporting growth. The present situation of significantly slower growth without material changes in the prospects for inflation requires shifting the pivot of monetary policy to a countercyclical mode,” Singh said.
He said India’s GDP growth rate has hit a seven-quarter low of 5.4 per cent in Q2 amid a manufacturing slump and deceleration in private consumption and investment. The gross value added (GVA), a critical indicator of economic activity, also came at 5.6 per cent in Q2.
Core inflation falls
The empirical relation between the core inflation and GDP growth rate is well established, Singh said, and a persistent decrease in the core inflation during the last 7-8 quarters, combined with the slowdown in growth rate, suggests that the difference between the actual and potential growth rate is increasing. “These observations and the fact that the labour market is not tight mean that the economy can grow significantly faster without triggering inflation,” he said.
Kumar shared similar views. He said since the October 2024 MPC meeting, economic conditions have worsened dramatically on both economic growth and inflation fronts. At the last meeting, he expressed concerns about the growth slowdown and the need to support it through a cut in policy rates.
“The decline in the Q2 2024-25 growth numbers…is much sharper than expected. The slowdown has led to the downgrading of the GDP growth forecasts for 2024-25 by most analysts from around 7 per cent earlier to around 6.5 per cent now…The extent of the slowdown is serious enough to warrant policy attention,” he said.
Kumar said that all sub-sectors of the industry segment including mining, manufacturing and electricity have decelerated. What is most worrying is the deceleration of growth of manufacturing value added from 7 per cent to 2.2 per cent. Kumar added that most central banks globally have started cutting interest rates in recent months, and India risks currency appreciation if it does not follow suit.
Eye on inflation
Former RBI Governor Shaktikanta Das, however, batted for keeping repo rate unchanged, saying progress made towards disinflation till now must be preserved.
He said the Indian economy continues remains resilient, notwithstanding the lower Q2 GDP data. The direction of inflation is downwards, he said, although the path is interrupted by periodic humps due to food inflation. Latest high frequency indicators suggest that economic activity is recovering in Q3, he said.
Rabi sowing has exceeded previous year’s level and high reservoir levels augur well for the overall rabi output. With the expected pick up in government capital expenditure and end of monsoon related disruptions, industrial activity is expected to normalise and recover from the lows of the previous quarter, he said.
On the demand side, consumption and investment is expected to pick up in the second half of the financial year on the back of factors like improving agricultural outlook, higher government expenditure, and steady services sector growth.
“In my overall assessment, the gains achieved so far in the broad direction of disinflation need to be preserved, while closely monitoring the evolving outlook of both inflation and growth,” he said.
RBI Deputy Governor Michael Patra echoed Das’s view, saying while the MPC remains open to support growth, it must await till ebbing of inflation happens on a durable basis or else the uneven progress made so far in disinflation will get dissipated.
“With the prospects for private consumption expected to improve over the rest of the year, the key is to get investment going, since exports are hostage to a difficult external environment. Private investment will want to see a robust revival of domestic demand to draw in the slack that it is now experiencing,” he said.
