This meeting — the last one before RBI Governor Shaktikanta Das’ current term ends — will not be easy, as analysis of a number of key indicators now indicates the annual growth rate to be about 6 per cent or even lower.

Policy watchers have started questioning the RBI’s policy stance following the weak GDP numbers and high retail inflation numbers. The Consumer Price Index (CPI) touched 6.21 per cent in October — up from 5.49 in September driven by high food prices. Year-on-year food price inflation rose to almost 10.87 per cent in October.

RBI’s Policy Measures

Despite the RBI raising the repo rate — the rate at which banks borrow from the central bank — by 250 basis points between May 2022 and February 2023, food prices have remained stubbornly high barring the months of July and August. 

“It is clear that RBI’s policy measures have failed to control inflation. The decision to hold on to (interest) rates has only dented economic growth,” former Finance Secretary Subhash Garg told The Secretariat.

“In any case, RBI’s policy measures have limited impact on controlling food inflation, which is primarily driven by supply-side management,” Garg said, adding that the central bank’s move may be aimed at protecting the banks’ profit margins.

Garg noted that temporary setbacks and artificial disruptions were the main factors that have pushed food prices and that RBI's policy measures have little impact on taming those.

Although former MPC members Ashima Goyal and Jayanth R Varma, in the August meeting of the MPC, underlined the need for the RBI to reduce policy rate to boost growth, Governor Das had maintained that India’s growth story was on track.

It is unlikely that RBI will reduce the repo rate based on the Q2 figures. Garg said that though economic growth in the second half is likely to improve somewhat, the overall economic expansion for the full financial year could even be less than 6 per cent. “It will be interesting to see how things pan out in the second half. Though the situation may be better, challenges remain. I will not be surprised if the growth rate for the full fiscal year falls below the 6 per cent mark,” he said.

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. 

In an earlier interview, the former IAS officer had 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,” Garg, who has also served as Executive Director at the World Bank, had told The Secretariat.

Other Options For RBI

Will the RBI pull out unconventional strategies to support growth while reining in inflation? For one, RBI may have to remove the current lending curbs imposed on non-banking financial companies (NBFCs). Credit costs for NBFCs have been rising, after the November RBI decision to increase risk weightage by 25 percentage points, from 100 per cent to 125. Credit deployment to NBFCs in the April-September period declined by (-)1.2 per cent, compared to a growth of 4 per cent in the corresponding period in the previous financial year, RBI data reveals.

A higher risk weightage would mean that banks and NBFCs will have to set aside a higher amount for loan provisioning.

The State Bank of India (SBI) has prescribed a cut in the cash reserve ratio (CRR) — the minimum percentage of deposits that banks must keep in cash with the central bank — on certain liabilities, to boost liquidity in the system. The CRR currently stands at 4.5 per cent.

The SBI report, authored by Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI, noted that it is better that the Q2 growth numbers do not prompt a knee-jerk reaction in terms of monetary impulse like rate cut, as headline inflation continues to trade at uncomfortable levels — though it is supposed to moderate from November.

Finance Minister Nirmala Sitharaman and Commerce and Industry Minister Piyush Goyal have already said that high cost of borrowing is leading to slowdown of economic growth.

Motilal Oswal Financial Services said that the weak GDP print has changed the dynamics “overnight”. Though there will be no action in the MPC meeting this week due to high inflation “the probability vis-a-vis a day ago has certainly risen”. In its analysis, it said that a rate cut in February is almost a certainty, provided the inflation comes off.

A rate cut looks more plausible in the February MPC meeting. Earlier, many analysts had projected that the RBI may not go in for an interest rate reduction anymore in the current financial year, following the surge in retail inflation.

Not just the RBI policy measures. The focus will also shift to Sitharaman, who will present the Union Budget in the next two months. Surely, she will have to carve out ways to push growth in the next financial year.