Growth Glass is Half Empty, Not Half Full, Says Nomura on RBI Interest Rate Pause

RBI Monetary Policy: Governor Shaktikanta Das-led MPC decided to keep the interest rate cut steady for the 11th consecutive time. And while the decision was in-line with analysts' expectations, the growth trajectory of the economy remains on a turbulent path.

The GDP figure for the July-September quarter dropped sharply to 5.4 per cent from the 8.1 per cent growth recorded in the corresponding period of last year. In the first quarter of FY25, the GDP figure stood at 6.7 per cent.

"The policy decision continues to prioritise inflation control over growth prospects," Dr. Aurodeep Nandi, India economist, executive director at Nomura. The Japanese investment bank estimated a rate cut of 25 basis points for the December meeting. It was perhaps the only financial institution to have a divergent view on the MPC policy rate decision.

"Our view remains that the growth glass is half empty, not half full and the recent sharp slump in GDP growth should have highlighted the higher growth sacrifice involved in keeping policy rates elevated. Meanwhile, the inflation increase is concentrated primarily in a few food items and underlying inflation continues to remain subdued," said Nandi.

Growth Outlook Remains Priority

While inflation remains above 4 per cent, Governor Shaktikanta Das said that growth continues to be a priority for India's economic trajectory.

Maintaining price stability and growth is very important, Governor Shaktikanta Das said during the MPC meet.

The RBI has revised its retail inflation forecast for FY25 to 4.8 per cent, up from 4.5 per cent. It has also revised its GDP growth estimate for FY25, lowering it to 6.6 per cent from the earlier projection of 7.2 per cent.

"However, there are indications that the policy paradigm could be shifting, which reflects in additional dissent within the MPC (4-2 vs 5-1 in favour of pause), Governor Das’ commentary that the growth outlook warrants monitoring, and the downgrade of FY25 GDP growth from 7.2 per cent to 6.6 per cent,” Nandi added.