RBI MPC faces growing clamour for rate cut

The picture is hazy. One does not know if complacency has set in the Narendra Modi government which is in its third term or the macro-economic happenings are beyond its means to keep the nation steady on the fastest growth path in the world. Economists are brainstorming given the seemingly deceleration of the economic growth rate. The unrelenting pace of retail inflation, more so the food inflation, has seemed to have sapped the appetite of Indian families for consumption, with the result that invigorating the economic has become a giant task for the Modi government. The nation is dismayed to learn about the lowest growth rate in GDP in last seven quarters at 5.4% in second quarter (July-Sept.). It is no less than a shocker.

Amidst a quiet unease, faced with growing calls for a cut in interest rates to spur the economy, the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India is meeting for three days from December 4 to take stock of the situation and take a call on the Repo rate i.e., the interest rate at which the RBI lends money to commercial banks, by repurchasing securities from them. It must be mentioned here that the central bank has resisted calls to cut Repo rate at its last nine consecutive meetings since February 2023.

The Repo rate is kept unchanged at 6.5% in order to effect balance between inflation and economic growth. Why did it so? Forecasts of potentially higher inflation, persistently high food prices in the country, and adverse geopolitical conditions hitting supply chains, be it for food, fuel or merchandise, have restrained the RBI from lowering the Repo rate. It makes one wonder, including experts and analysts, if the government has done enough to rein in the raging inflation in the country, which obviously led to the families tightening their purse strings. Even as the inflation surged to a 14-month high of 6.21% in October, expressing helplessness, which sounded more like a clarion call, there were also pleas from the government for the RBI to lower the interest rate. This has made some analysts wonder if the government wants to guide the direction of interest rate handing by the central bank. In the last one month, Chief Economic Advisor V Anantha Nageswaran, Commerce Minister Piyush Goyal and the Finance Minister herself, Nirmala Sitharaman, emphasised the need for reducing borrowing burden for commercial entities. Earlier, the CEA demanded that food items be taken off retail inflation basket, since monetary policy does not impinge on them and also as they are supply-driven; however, the central bank feels food inflation is central to the monetary policy decisions.

What the Q2 figures indicate is that even the RBI projections of growth rate have failed. Sluggishness is plaguing manufacturing and mining sectors. The urban demand is on the wane, while the rural demand is not enough to offset the imbalance. Is the economy heading for a cyclical slowdown, which would pain the Indians more and hit employment growth prospects? Without pushing through economic reforms in the last couple of years, apparently due to political compulsions due to one election after the other, the government seems helpless now and wants the central bank to come to its rescue.

Should RBI be so focussed on its 4% inflation target which it never achieved? Amid the industrialists, investors as well as individuals keeping off spending or investments in expectations of rate cut in future, it will put a strain on economy growth, fear experts. With three of the six member MPC being newcomers and the old hand Michael Patra retiring soon, it may be tough for the RBI committee to ignore the pressure from the government.