In an interview to The Secretariat, Garg asserted, “RBI’s interest rate policies have not affected growth at all". 

The RBI’s key policy rate - the Repo, or the overnight rate at which other banks borrow from the central bank - has been a constant at 6.5 per cent since February 2023. Despite the higher interest rate compared to many other rival economies, credit disbursal by banks stood at Rs 164.3 lakh crore at the end of March 2024, a yearly growth of 20.2 per cent compared to 15 per cent a year before. 

Repo: To Cut Or Not To Cut

The RBI’s three-day Monetary Policy Committee (MPC) meeting begins Monday amid expectations that the central bank will reduce the repo rate, especially after the US Federal Reserve’s move to lower interest rate by 50 basis points last month.

The RBI has held the Repo rate steady for nine consecutive quarters to contain inflation. However, with India’s annual inflation rate, measured on the consumer price index (CPI), rising at a satisfactory, slower pace of 3.65 per cent in August — compared to 3.6 per cent in July, the second lowest figure in the last five years — the chorus for a cut in policy rates has become sharper. 

The former IAS officer pointed out that conventional economic wisdom dictates that a higher interest rate would discourage credit growth, and by implication, consumer demand.

“Yet, what we see over the last few years, is faster credit expansion, irrespective of the interest rate policy. The deposit rate has been the sole constraining factor in credit growth, much of which is going into personal and unsecured loans,” said Garg, who has also served as Executive Director at the World Bank.

While non-food bank credit registered a growth of 15.1 per cent (to Rs 162.92 lakh crore) as of July 2024, deposit growth lagged at 11.3 per cent (at Rs 213.28 lakh crore), according to RBI data.  

“We seem to be getting into a lower growth trajectory regardless of the Repo rate,” the former finance ministry official said. A cut in the Repo rate is a nudge to banks to lower their lending rates, while a hike in the policy rate charged by the central banker is an indication that it wants banks to increase lending. 

India's gross domestic product (GDP) for the quarter ending June 30, 2024, hit a 15-month low of 6.7 per cent compared to 8.2 per cent in the previous yearly period. 

“The rationale given was that government spending had reduced in the election months… (but) we find indications are that the second quarter growth is likely to be nearly similar,” Garg pointed out, adding, “It looks like we are witnessing a tapering off of growth.”

In a recent report, Goldman Sachs forecast that India’s economy may expand at 6.7 percent in calendar year 2024, and 6.4 percent in 2025. The bank feels that commitment to cutting fiscal deficit and slowing real consumer demand could be a drag on demand. 

The wars in the Middle East and in Europe have meant higher prices of certain commodities, as also higher shipping costs for Indian industry, as shipping avoids the now risky Red Sea route and takes the far longer route via Cape of Good Hope. This means that merchandise exports, which were at US $437.11 billion in 2023-24, posting a modest growth of 3.1 per cent, is unlikely to lift anytime soon.

Higher costs, a low labour productivity rate, and new non-tariff barriers such as carbon taxes, are also unlikely to aid India’s exports, which account for some 23 per cent of its GDP.

India's food inflation conundrum

Though the RBI held on to the Repo rate to contain inflation, three of its MPC members, including Ashima Goyal (whose tenure ended in August), had pointed out that there was a need to lower rates to help the economy grow. 

However, all members of the RBI's MPC may still not be in agreement with this thought process.

“Inflation has been brought within the target band of 2-6 per cent, but our target is 4 per cent. Over the last several MPC meetings, we have been reiterating the importance of staying the course and not getting carried away by some dips in inflation,” RBI Governor Shaktikanta Das recently said at a forum organised by The Bretton Woods Committee in Singapore.

Even as India’s CPI-based inflation grew at a slower pace, the authorities and Indian policymakers are worried about higher food inflation. The Consumer Food Price Index (CFPI) rose to 5.66 per cent in August, according to data released by the Ministry of Statistics and Programme Implementation (MoSPI). 

Garg, though, felt India should not be overtly concerned about the rising food prices. He added that monetary policy and interest rates do little to tame food inflation.

“Food inflation is based on other dynamics,” he said, adding that prices are more governed by supply-demand management.

Garg also pointed out that the government should not shy away from importing food items to ease supply-side constraints. “Temporary setbacks and artificial disruptions are the main factors driving food prices... We must learn to live with food inflation,” he said, adding that sudden export bans on food items such as rice and wheat have hurt farmers even more than the vagaries of weather. 

“It is important to create a regime of steady supply,” Garg said.