RBI’s MPC Faces Tough Choices Amid Inflation and Slowing Growth
India’s Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) started its important three-day meeting on December 4 with the country’s ongoing inflation and slowing economic development. While the nation eagerly awaits action to address these urgent economic issues, RBI Governor Shaktikanta Das is scheduled to make the policy decisions public on December 6.
During its tenth straight meeting in October, the MPC maintained the benchmark repo rate at 6.5%, but changed its position from “withdrawal of accommodation” to “neutral.” The MPC has an uphill battle to strike a balance between inflation management and growth support, as inflation reached a 14-month high of 6.21% in October, beyond the RBI’s 4-6% tolerance level, and GDP growth slowed to 5.4% in Q2FY25.
Global and Domestic Dynamics at Play
The rupee’s record low vs the dollar, which was caused by geopolitical concerns and a stronger dollar following the US elections, further complicates matters. Lead Economist at Emkay Global Madhavi Arora emphasized the difficulties in defending quick rate decreases when the MPC is still committed to attaining long-term deflation.
A rate cut could increase GDP, but it could also make currency pressures worse. According to Arora, unconventional policies like liquidity easing can provide a well-rounded strategy. “A CRR rollback to pre-COVID levels, injecting ₹1.2 lakh crore liquidity, might be an effective tool,” she said.
Experts Divided on Rate Cuts
There are still differing views on the MPC’s approach.
- Though he expects liquidity injections and forward guidance on possible rate reductions in 2025, Rahul Bajoria of BofA Securities does not expect an imminent rate cut.
- A dovish stance is expected by DBS Bank economists, with inflation moderation opening the door for cuts in February 2025.
- Kotak Mahindra AMC’s Deepak Agrawal predicts that liquidity measures will be a major consideration in the next decision, perhaps indicating future rate changes.
Broader Implications
The MPC’s decision comes at a crucial time when GDP is weakening and inflation is predicted to decline. Any action will have a big impact on market sentiment and India’s macroeconomic future, whether it be targeted liquidity injections or CRR changes.
Financial stability and growth assistance must be balanced, according to Ajit Banerjee of Shriram Life Insurance Company. “Aggressive rate cuts could create an asset bubble and worsen existing financial stress in vulnerable segments,” cautioned the economist.
The announcement on December 6 will give important details about the RBI’s plan for controlling inflation and boosting GDP as it negotiates these choppy waters.
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