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The Reserve Bank of India's Monetary Policy Committee (MPC) recently concluded its three-day meeting, and as anticipated by leading rating agencies, the committee opted to maintain the status quo on interest rates. This decision comes despite October 2024's Consumer Price Index (CPI) inflation exceeding the 6% upper limit of the medium-term target range of 2-6%. The prevailing high inflation, coupled with a second-quarter GDP growth that significantly undershot the MPC's expectations, created a complex scenario for the committee. The agencies' analyses, however, largely pointed toward a pause in rate adjustments, at least for the immediate future, reflecting a careful balancing act between addressing inflation and supporting economic growth.
Aditi Nayar, Chief Economist at ICRA Ltd., articulated this nuanced perspective. While acknowledging the inflation breach, she anticipated a holding pattern for the December 2024 meeting, anticipating a downward revision of the FY2025 growth forecast. The possibility of a rate cut in February 2025, however, hinges on the subsequent two inflation readings showing a downward trend. This conditional forecast highlights the data-driven approach taken by the agencies, suggesting that future actions will depend on incoming economic indicators. The uncertainty reflects the complexities of navigating a scenario where economic growth lags and inflationary pressures remain high.
CareEdge, another prominent rating agency, echoed a similar sentiment in its analysis. The agency's note emphasized the RBI Governor's challenge in balancing the competing risks of inflation and economic slowdown. Although acknowledging the aggravated growth concerns, CareEdge also forecasted a status quo on rates for the December meeting. Instead of an immediate rate cut, the agency predicted a 'dovish commentary' from the governor, setting the stage for a potential 25-basis-point rate cut in the February 2025 policy meeting. This strategy would strategically manage market expectations and create a smoother transition towards looser monetary policy if the inflation outlook improves.
CareEdge's detailed forecast projected CPI inflation to dip below 5% in the fourth quarter of FY25, providing a window for the initially proposed 25-basis-point cut. The agency further anticipated an additional 25-basis-point reduction in the policy rate for FY26, with the possibility of a more substantial 50-basis-point cut should economic growth remain subdued. This scenario planning acknowledges that the current economic climate remains volatile and subject to unforeseen shifts. The agency also revised its GDP growth forecast for FY25 downward to 6.5%, anticipating a similar adjustment from the RBI, which initially projected 7.2%. The discrepancy highlights the challenges inherent in accurately predicting economic performance.
The differing perspectives on the appropriate policy response were further illuminated by the contrasting views from the Confederation of Indian Industry (CII). Chandrajit Banerjee, Director General of the CII, advocated for a more proactive approach, urging the RBI to cut the key repo rate by 25 basis points alongside supplementary liquidity-enhancing measures. This call underscores the ongoing debate among economic experts on the optimal monetary policy response to the current economic conditions, showcasing the range of opinions and strategies being considered. The diversity of opinions highlights the complexities inherent in navigating a scenario of high inflation and slowing economic growth, highlighting the multifaceted nature of the challenges faced by the MPC.
In conclusion, the decision by the MPC to hold interest rates reflects a cautious approach, balancing the concerns of persistent inflation with the need to support economic growth. While several rating agencies anticipate a rate cut in the near future, contingent on upcoming inflation data, the immediate focus remains on assessing the evolving economic landscape. The divergence in opinions among economic experts highlights the difficulty in predicting future economic trajectories and underscores the challenges inherent in setting the optimal monetary policy response in the face of such uncertainty. The coming months will be crucial in determining the next steps taken by the MPC as it navigates the delicate balance between combating inflation and fostering economic expansion.
Source: Rating agencies expect MPC to hold rates due to high inflation