A Strategic Balancing Act in RBI’s Recent Monetary Policy Announcement

A well-calculated move in the tight economic environment, the decision of the Reserve Bank of India (RBI)-while keeping the policy repo rate unchanged at 6.50% at its meeting on October 9, 2024 for the consecutive tenth time-looks to be a balancing act. By leaving the rate unchanged, the RBI will not only contain the inflation rate but will also help create an environment propitious for sustainable growth-a step quite in tune with the economic realities India is going through these days.

A Call to Stability Amid Inflationary Pressures

The last hike in the repo rate was in February 2023, when the inflationary pressures were beginning to spiral upwards unchecked. Since then, the RBI has able to deftly rummage through a host of economic challenges, a fact that underlines the flexibility of its monetary policy framework. Indeed, the latter has completed eight years and is already considered one of the big structural reforms touching India’s economic architecture. The MPC projects 7.2% as the real GDP growth rate for 2024-25, which is indicative of underlying strength in confidence in the Indian economy amidst external pressures.

Inflation, particularly of food and fuel items, remains a concern. Even as the RBI projected CPI inflation at 4.5% for FY25, its acceptance of upside risks from volatile prices speaks to a pretty realistic assessment of the route ahead. Governor Shaktikanta Das captured the delicate tightrope the RBI must walk on managing inflation when he described the challenge as akin to riding a ‘temperamental horse’ that needed to be kept in check. In this context, it is important that the central bank remains alert and proactive, ensuring the unanticipated situation does not result in unraveling the gains made so far as far as inflation control is concerned.

Growth Projections: A Positive Outlook

Thus, according to an assessment carried out by the MPC, growth prospects appear quite upbeat. Even though the growth forecast is reduced to 7.0% for Q2 FY25, the pick-up in the subsequent quarters to 7.4% points to a strong recovery trajectory. In sum, this resilience in growth, led by strong domestic consumption and revival in investment, was a reaffirmation that the Indian economy is indeed all set on the path of enduring recovery. Further supporting this optimism is expected improvements in agricultural output, coupled with favorable weather conditions.

What is far more significant and wait-worthy, though, is the shift in the MPC’s stance to ‘neutral’. This changes everything for the future course of rate cuts, depending on how the economy would pan out. This change in stance is an admission of readiness to adapt to the presentation of new information and presupposition-essential ingredients in today’s fast-changing global ambiance.

The Imperative for Responsible Growth

While on one hand, the overall health for banking and NBFC sectors seems to be fairly robust, there are all omens that caution needs to be taken. Indeed, the Governor’s remark on some NBFCs aggressively pursuing growth at the cost of risk management flags one such pitfall. It is only such a mentality-‘growth at any cost’-that leads to financial instability. But of greater significance is the RBI’s cacophony of opinion on self-correction within these institutions. Proactive action is required to avoid getting into the high-cost-lending risks.

Second, the proposals on enhancing consumer protectors go a long way-albeit in respect of prepayment penalties for micro and small enterprises-indicating that commitment that growth will not be exhilarated at the cost of consumer welfare. Given the increasing importance of security features for money transfers today, verification features for the same are a critical requirement of financial transactions that the RBI is addressing aptly.

Future Outlook and Managing a Complex Terrain

Going forward, it would be of paramount importance to take a judicious stance that would help RBI balance economic growth with inflation. The emphasis from the central bank on tracking the key macroeconomic parameters, along with its flexible approach toward monetary policy, would be highly useful in mitigating the emerging risks from geopolitical conflicts and climatic vagaries.

This December, the probability of a rate cut is still conditioned by the vagaries of the economic indicators. If these continue to point at overall weakness, the RBI may have little choice but to change its stance to prop up growth. On the other hand, if the economy gathers steam, the prudent thing to do might be to wait and watch until early 2025. The delicate balance that the RBI is trying to achieve becomes very important in building such an environment that will stimulate investment and consumer spending and give the country a sound basis for long-term economic stability.

By Anamika Singh – Founder, StraCon Business Services and Rohit Kumar Singh

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