Monetary Policy Decisions
The Monetary Policy Committee (MPC) at its recent meeting held on December 6, 2024 has kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged the 11th consecutive time, at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate continues at 6.75 per cent.
The MPC also re-affirmed its neutral monetary policy stance and to remain clearly focused on a durable alignment of inflation with the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
Factors affecting Growth and Inflation Outlook
The RBI opines that the global economic outlook continues to be stable and there are signs of growth seen in several economies of the world despite weakening of inflation and volatile global financial markets amid persistent geopolitical risks and trade policy uncertainty.
As far as the Indian economy is concerned, the real gross domestic product (GDP) registered a growth of 5.4 per cent in the second quarter of the financial year 2024-25 which was somewhat lower than expected, largely due to decrease in private consumption and investment growth rates despite an increase in government spending compared to a contraction in the previous quarter.
On the supply side, the growth in gross value added (GVA) during this quarter was aided by resilient services and improvement in the agriculture sector, but here too, the weakness in industrial activity in the manufacturing, electricity and mining sector slowed down the overall growth.
However, the RBI expects that robust kharif food grain production and good rabi prospects, coupled with an expected pickup in industrial activity and sustained buoyancy in services may boost private consumption in the times to come. Even the investment activity is expected to pick up. Besides, resilient world trade prospects may also provide support to external demand and thereby our exports.
But at the same time, we should be wary of the uncertainties caused by the geo-political tensions, volatility in international commodity prices, and geo-economic fragmentation, which continue to pose risks to the global outlook.
GDP projected to grow at a higher rate in the third and the fourth quarter
In the backdrop of the prevailing domestic and global factors, the RBI has projected that the real GDP may grow at 6.6 per cent for the financial year 2024-25 and at 6.8 per cent and 7.2 per cent for the third and fourth quarter of the current financial year respectively. The Indian economy may continue to grow at high growth trajectory even in the next financial year 2025-26 as the RBI provides the projection for the real GDP growth rate of 6.9 per cent and 7.3 per cent for the first and second quarter of the next financial year as well. The risks are reported to be evenly balanced. (Refer Chart below)
Inflationary pressures are likely to soften in the coming periods
Containing headline inflation within the defined target range of 4 percent (plus / minus 2 percent) is one of the core objectives of the Central Bank. At the same time, it has to pursue the adjacent objective of maintaining growth momentum.
According to the RBI, the headline CPI inflation surpassed the upper tolerance level of 6.0 percent as it surged to 6.2 per cent in the month of October from 5.5 per cent in September and less than 4.0 per cent in period July-August. This was due to a massive increase in food inflation and an uptick in core (CPI excluding food and fuel) inflation.
However, the RBI hopes that food inflation may soften in last quarter of the current financial year due to seasonal easing of vegetables prices and kharif harvest arrivals and a favorable soil moisture conditions thanks to comfortable reservoir levels which may give boost for rabi production levels as well.
But then there are upside risks also to reckon with as far as food inflation is concerned emanating from the possibility of adverse weather events which may drive the international agricultural commodity prices to higher levels. Even energy prices, which have been softening in the recent past, may have to be watched as regards its sustenance. Taking all these factors into consideration, CPI inflation for 2024-25 is projected at 4.8 per cent as it may drop to 5.7 per cent and 4.5 per cent in the remaining two quarters of the current financial year. This trend is estimated to continue in the first two quarters of the next financial year 2025-26 at 4.6 per cent and 4.0 per cent respectively. The risks are reportedly evenly balanced. (Refer Chart 2).
Rationale for Monetary Policy Decisions
It is clear that the MPC has given due consideration to the recent advent of the rise in the inflation rates and the decrease in the growth rate of the GDP in India since its last policy stance declared in the month of October, 2024 and so it has refrained from softening its policy rate stance at this juncture even as two of its members had reportedly suggested to reduce the policy rates by 25 basis points this month itself.
However, we may expect a fall in the policy rates may be in the fourth quarter of the current financial year if the things work out as per the RBI’s projections about rise in business and consumer sentiments. The inflation is also projected to be back within the tolerable limits and if it so happens, it may contribute to increase in the purchasing power of the consumers. Though increased intensity of the geo-political uncertainties and financial market volatility continue to pose as upside risks to inflation. The MPC has, for now, decided to continue with its neutral stance of its monetary policy declared on 6th December, 2024.