MPC to keep rates unchanged amid slowing growth, rising inflation

The Reserve Bank of India’s monetary policy committee (MPC) is unlikely to change the repo rate at its three-day meeting ending on Friday, a Mint poll of economists and bond market participants showed. The policy rate may remain unchanged at 6.25%, and the policy stance neutral. The committee, however, may be divided on voting for a rate change, the poll showed. At the last policy meeting in October, five members had voted for status quo, and one for a rate cut.

India's economic growth slumped to a seven-quarter low of 5.4% in Q2, against the RBI's estimate of 7%, thanks to slowing growth in manufacturing and mining. The slowdown has raised concerns about whether the economy will reach RBI's forecast of 7.2% for FY25. Meanwhile, retail inflation in October crossed expectations to touch 6.21%. 

“With CPI inflation having breached the 6% upper limit of the medium-term range of 2-6% in October 2024, we anticipate a status quo from the MPC in its December 2024 meeting, in spite of the GDP growth print for Q2 FY25 sharply undershooting the committee’s expectations. A February 2025 rate cut may be forthcoming if the next two inflation prints recede," said Aditi Nayar, chief economist, Icra. 

Also read | Not upset about MPC view, flexible inflation targeting has helped: J.R. Varma

The MPC had eased its policy stance to 'neutral' in October, raising hopes of a December rate cut. However, RBI governor Shaktikanta Das has been steadily preparing the market for a pause since then, stating once that a rate cut now could be “premature and very, very risky" due to emerging risks to inflation outlook. After the October policy itself, Das had stated that though the horse of inflation had been brought to the stable--retail inflation in September was 5.49%-- it has to be kept leashed and locked to prevent it from bolting. Das's words proved prescient as costlier vegetables tipped retail inflation in October beyond the central bank's inflation tolerance threshold of 6%.

Meanwhile, government functionaries have been pressing for an interest rate cut.

“I certainly believe they (RBI) should cut interest rates. Growth needs a further impetus," commerce minister Piyush Goyal said at an event on 14 November, adding it's an “absolutely flawed theory" to consider food inflation while deciding on rates. A few days later, finance minister Nirmala Sitharaman echoed his words. “At a time when we want industries to ramp up and build capacities, our bank interest rates will have to be far more affordable," she said on 18 November.

Most participants Mint polled expect RBI to revise its forecast lower to 6.5-7% and inflation forecast higher.

Also read | Inflation likely hit a 3-month high in September: Mint poll

“There could be a change in RBI projections for both inflation and GDP, as inflation has been higher so far than the RBI forecast for Q3, and GDP growth is expected to be lower in Q2. Hence, it would be of interest to see what the projections this time are," said Madan Sabnavis, chief economist, Bank of Baroda.

However, the market expects RBI to announce some measures to ease liquidity. Liquidity had slipped into deficit earlier this week after two months due to goods and services taxes outflow and increased foreign portfolio investors’ (FPIs) outflows since October. The system is in deficit of ₹9,489 crore, according to the latest available data on RBI.

“Given these constraints, reversing the negative credit impulse should be the policy focus, in our view. The RBI can and should begin to act on the quantitative side, easing liquidity so that system deposit growth picks up, e.g., via OMO (open market operations) purchases or a cut in CRR (cash reserve ratio). Tightening external conditions have limited the ability to inject liquidity via forex interventions, especially as reserves have been drawn down over the past few months to maintain low volatility," said Neelkanth Mishra, chief economist, Axis Bank.

And read | When food inflation became main course on MPC menu