MUMBAI: Despite a sharp slowdown in economic growth and widespread calls for interest rate cuts to stimulate the economy, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) faces significant challenges in reducing rates.
The latest GDP data for Q2, showing growth at just 5.4%, has intensified pressure on the RBI’s MPC to consider easing rates, even as expectations of a softer monetary policy led to a decline in bond yields on Friday.
The government has also weighed in on the issue. Commerce Minister Piyush Goyal suggested excluding food prices from inflation calculations, while Finance Minister Nirmala Sitharaman advocated for looser rates to foster investment and economic growth. However, while monetary policy can influence demand and help moderate overall price levels, it cannot directly affect the cost of specific food items like tomatoes, onions, or potatoes.
Shreya Sodhani, an economist at Barclays, expects the RBI to hold rates steady this week, prioritizing price stability despite the weaker growth outlook. “While a disappointing Q3 GDP print could push the MPC to ease policy, the timing will depend on the evolving growth and inflation dynamics,” she said in a recent report.
In the October MPC meeting, Nagesh Kumar, one of the newly inducted external members, was the only one to call for an immediate 25 basis point rate cut. Previous members, including Jayanth Varma and Ashima Goyal, had also advocated for cuts, with Varma particularly vocal about how the current rate stance risks undermining India’s growth potential.
Looking ahead, Aditi Nayar, Chief Economist at ICRA, noted that the second half of FY25 could see some improvement in rural demand, driven by strong kharif crop output and a favorable outlook for rabi crops. However, with inflation still elevated, ICRA forecasts that the MPC might consider a rate cut only in February, assuming inflationary pressures ease by then.
While a rate cut remains uncertain, there is growing expectation that the RBI may take other measures to ease liquidity conditions and reduce short-term interest rates in the money market.
