The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) began its three-day meeting on Wednesday, setting the stage for a crucial decision on the repo rate. The outcome, scheduled to be announced on December 6 at 10 AM, comes amid growing calls for a rate cut to address India’s slowing economic growth. However, inflation concerns could complicate the decision.
The repo rate, currently at 6.5%, has remained unchanged for nine consecutive meetings. This reflects the RBI's cautious approach to balancing economic growth and inflation control.
Push for a Rate Cut
Key economic figures have urged the RBI to reduce borrowing costs. Commerce Minister Piyush Goyal criticized the direct connection between food inflation and interest rates, calling the linkage "flawed." Despite such appeals, RBI Governor Shaktikanta Das has consistently emphasized inflation, particularly food price inflation, as a critical concern.
Economic Growth Slows
India's GDP growth dropped to 5.4% in the second quarter of FY25, the weakest in seven quarters. Manufacturing growth slowed to 2.2%, while private consumption and investment also weakened. Agriculture provided some relief, growing at 3.5%. The slowdown has intensified discussions on whether the RBI's current policies are adequately supportive of growth.
Inflation Remains a Challenge
Inflation, primarily driven by rising food prices, reached 6.2% in October, the highest in over a year. While a slight easing is anticipated for November, inflation remains above the RBI's target of 4.5%.
Liquidity Pressures and CRR
Liquidity in the banking system has tightened due to GST outflows, foreign exchange interventions, and rising overnight borrowing costs. Analysts suggest measures like a phased reduction in the Cash Reserve Ratio (CRR) or open market operations (OMO) to address these pressures.
A 25-basis-point CRR cut could inject an estimated Rs 1.15 lakh crore into the banking system.
As the MPC navigates this complex economic landscape, the balancing act between supporting growth and controlling inflation remains challenging.
