In the run-up to the December meeting of the monetary policy committee, there was a debate over whether the sharp deceleration in growth should prompt a cut in interest rates, even as inflation remained above the upper threshold of the RBI’s inflation targeting framework. The MPC, however, continued to attach primacy to inflation concerns. Resisting pressure from the government and the clamour for lower rates from sections of the market, it maintained the status quo, though two external members on the committee voted for a cut. The repo rate stands at 6.5 per cent. Alongside, the MPC chose to continue with its neutral policy stance. As RBI Governor Shaktikanta Das reiterated, “price stability is essential for sustained growth.”
The committee’s decision to keep interest rates unchanged rests on its view that even as the economy slowed down in the second quarter, the outlook for growth is “resilient”. That even as GDP growth declined to a multi-quarter low of 5.4 per cent, against the RBI’s projection of 7 per cent, the momentum has picked up in the second half of the year. Das noted that high-frequency indicators indicate that the economic momentum has “recovered, aided by strong festive demand and pick up in rural activities”. In other words, the central bank expects the slowdown to be transitory — it has projected GDP growth to bounce back to 6.8 per cent in the third quarter, and to 7.2 per cent in the fourth quarter. The central bank has, however, announced a cut in the cash reserve ratio which would increase the lendable resources of the banking system, supporting growth. On inflation, the RBI remains cautious. It expects food price pressures to continue in the third quarter, to ease only towards the end of the year. The moderation is expected to be “backed by seasonal correction in vegetable prices, kharif harvest arrivals, likely good rabi output and adequate cereal buffer stocks”. Retail inflation has now been pegged at 5.7 per cent in the third quarter, falling to 4.5 per cent in the fourth quarter. The central bank has now projected alignment with the 4 per cent target in the second quarter of the next financial year.
