Key Points
- Retail inflation rose to 6.2% in October, exceeding the MPC’s 6% tolerance level.
- The MPC is expected to leave the repo rate unchanged at 6.5% during the December meeting.
- Economic growth in Q2FY25 slowed to a two-year low, but this is unlikely to lead to a rate cut.
- The RBI is expected to update its GDP growth and inflation projections for FY25.
- Governor Shaktikanta Das emphasized a neutral stance for greater flexibility in policy decisions.
- Despite inflation pressures, India’s economic resilience and growing consumption are noted.
- Economists expect possible rate cuts in February 2025 if inflation decreases.
Looma News
Despite a slowdown in India’s GDP growth during the second quarter (Q2FY25), the Monetary Policy Committee (MPC) is expected to keep the repo rate at 6.5% during its meeting from December 4-6. The committee’s main goal is to bring retail inflation, which hit a 14-month high of 6.2% in October, back to its target of 4%. The MPC is unlikely to lower interest rates, even though some Union cabinet ministers and the Chief Economic Adviser have called for softer rates.
Alongside inflation concerns, the GDP growth for Q2FY25 slowed to 5.4%, the lowest in two years, down from 6.7% in the previous quarter. However, economists believe the MPC will prioritize controlling inflation over stimulating growth. The MPC is expected to adjust its inflation and GDP forecasts, with inflation likely to exceed the current 4.5% forecast for FY25, and GDP growth likely to be revised down from the initial 7.2% forecast.
In a statement during the October MPC meeting, Reserve Bank of India (RBI) Governor Shaktikanta Das emphasized the importance of managing inflation while supporting growth. He noted that the recent rise in inflation would not interfere with the long-term goal of achieving 4% inflation. The Governor also backed the move to a “neutral” policy stance, offering flexibility to adjust monetary policy as economic conditions change.
At the last MPC meeting, the committee decided by a majority to keep the repo rate unchanged at 6.5% and shift to a neutral stance. This decision reflected the committee’s cautious approach, aiming to align inflation with the target while supporting steady economic growth. There is no immediate need to cut the repo rate, especially considering the resilience of India’s economy, with strong performance in consumption, agriculture, and industry.
Economists like Madan Sabnavis from Bank of Baroda and Aditi Nayar from ICRA expect the MPC to maintain the repo rate at 6.5%, but they also think the committee might update its growth and inflation projections. Nayar suggests that if inflation starts to drop in the coming months, a rate cut could be possible by February 2025.
