After three days of review, the MPC will announce the outcome on Friday, including the decision on the repo rate
All eyes are on the Reserve Bank of India (RBI) as its six-member Monetary Policy Committee (MPC) meeting started this week while India's economy is trying to navigate a crossroads marked by economic turbulence. Expectations are high as the MPC meeting commenced after India’s economic growth rate slowed down to 5.4 per cent in the second quarter of the current financial year.
After three days of review, the committee will announce the outcome on Friday, including the decision on the repo rate. The RBI has maintained the repo rate at 6.5 per cent since February 2023.
The growth rate of world's fifth-largest economy slumped to a seven-quarter low in the September quarter and retail inflation in the country reached a 14-month high of 6.2 per cent in October. While the growth rate is lower than consensus estimates and RBI's 6.8 per cent projection for the quarter, inflation crossed its tolerance band of 6 per cent.
Since then speculation has been going on around whether RBI will maintain its repo rate or consider a cut to boost the economic growth. Repo rate is the interest rate at which the RBI loans money to commercial banks. A lower repo rate makes the borrowing more affordable in the country whereas a higher repo rate will make the borrowing expensive for banks leading to a low investment.
RBI uses repo rate to also control inflation. For example, if the economy is growing too fast and prices are rising with it then the central bank raises the repo rate as well to slow down spending. Likewise, when the economy is slow, the central bank lowers the repo rate to encourage more spending.
In the current year, even as the growth slowed down, RBI has prioritised rising food prices to determine the repo rate.
“It is a flawed theory to consider food inflation for making a choice cutting rates. So, RBI must cut interest rates. This is my personal view, not that of the government," said commerce minister Piyush Goyal, while speaking at a media summit.
Echoing the same sentiment, finance minister Nirmala Sitharaman also called for an affordable bank borrowing rate, while attending a State Bank of India (SBI) event.
However, RBI governor Shaktikanta Das has not signaled any immediate rate cut. Following Goyal's comment, Das, in that same media summit, said that the Indian economy is sailing through smoothly due to a stable financial system. Notably, the MPC had changed its policy stance from 'Withdrawal of Accommodation' to 'Neutral' during its fourth bi-monthly meeting in October.
Even with the growing expectations for a rate cut, economists believe that India’s central bank will likely keep the rate unchanged.
“It is unfortunate that the government is using food inflation as a peg to say that the monetary policy cannot impact food inflation and therefore it should be targeting core (inflation) only. Because if you look at the core, you will find that the core is also rising. The argument, in my opinion, ends there only,” said Indranil Pan, chief economist at Yes Bank.
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Pan also pointed out the possibility of a new index coming up in January 2026 where the weightage of 45.9 per cent assigned to the food in consumer price index (CPI) might come down.
“If it happens then, then it will likely get redistributed in core where prices are comparatively stickier. So if the weightage increases there then why should I be expecting that the core inflation will come down and RBI would be able to cut rate,” he added.
Paras Jasrai, senior economic analyst at the India Ratings and Research asserted that the growth slowdown is a concern but higher inflation is an even bigger concern.
“The latter eats away purchasing power of households which can lower spending and GDP growth,” Jasrai pointed out.
He also predicted that the MPC will likely side with the risk of higher inflation and maintain a status quo.
Looking at the inflation front, Manoranjan Sharma, chief economist at Infomerics Ratings, also noted that this is not the right time for tweaking this rate and a rate cut is conceivable in February 2025.
Even though the country waits eagerly for the decision amid all the tussles, the meeting holds significance that goes beyond the policy review.
RBI governor Das' current tenure will end on December 10, 2024 and the announcement on whether it will be extended or not is still awaited. If it does not get extended then this would the last MPC-meeting to be held under Das’ chairmanship. Das, who has been at the helm of RBI since 2018, was given an extension of three years in 2021.
A government source told Reuters earlier that neither other candidates were considered nor a selection committee was formed, which indicated a probable extension to Das’ Tenure.
It is not the first time that the central bank and the central government are holding different opinions on the repo rate. In 2018, when Urjit Patel was the RBI governor, the centre reportedly urged for a cut in interest rates to boost liquidity in the economy.
Duvvuri Subbarao, who was the RBI governor between 2008 and 2013, also said in his book that there has always been a tussle between the centre and the central bank regarding repo rate.
He pointed out his several differences with the Finance Ministry. In his tenure, the government wanted the RBI to lower interest rates, which was resisted by the central bank, he wrote.