The Indian middle class is tightening their belt and curbing shopping bills of biscuits to cars while facing a wild inflation horse for a long time when economists flagged K-shaped recovery and wide income inequality. The cut in expenditure has hurt the consumption demand in an economy whose second quarter growth hit a nadir in over two years. Moreover, the government’s slower capex spend amidst the Lok Sabha and other key state elections have also made life tougher for the high-flying economy, which the Modi administration aims to take to the third rank on the list of world’s top economies – or just after the behemoths US and China.
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It may not be zyada or too much for the ambitious target the government has set to climb the charts of leading global economies and Indians will be proud about it. It is also not zyada to expect economic reliefs. The Union Budget is less than two months away where we are so far unsure of what fiscal measures Nirmala Sitharaman and her finance ministry would adopt. But the economy surely needs a boost. Moreso, after the Reserve Bank of India perhaps exposed two big worries (inflation and growth) that authorities are at constant war with to deliver the best.
The inflation-growth dynamics on Shaktikanta Das’ table
The dynamics of inflation and growth are super critical. In MPC’s language — Strong foundations for high growth can be secured only with durable price stability. To be sure though, analysts pegged improving growth prints in the quarters ahead, while they also slashed growth targets for this election-dominated fiscal year where welfare schemes probably took precedence.
Among the key things that RBI did today were it left repo rate and stance unchanged while lowering the cash reserve ratio of banks by 50 bps to 4% in two tranches. The CRR cut will directly target the liquidity deficit caused by rupee depreciation and capital outflows and this will release primary liquidity of about Rs 1.16 lakh crore to the banking system.
The CRR cut move is also to address an unfavourable growth-inflation matrix, said Dharmakirti Joshi, Chief Economist, CRISIL.
Debopam Chaudhuri, Chief Economist of Piramal Enterprises, said “It is encouraging to note RBI asserting its independence amidst pressures of a rate cut arising from fiscal policy makers.””However, the timing may not be optimal. An early rate cut will go a long way in reviving Indian economic activity, job creation and private capex in FY26, accounting for any lags between rate cuts and their effect on real economy,” he added.
That brings us to what else Shaktikanta Das spoke of today in what was his last monetary policy briefing for this tenure. The RBI decided to slash the FY25 GDP target to 6.6% from 7.2% forecast in the previous RBI policy meeting, while it raised the retail inflation forecast for this fiscal to 4.8% from 4.5%.
“The change in RBI’s projections for FY25 is primarily to account for the anomalies in the last readings for both growth and inflation. RBI remains optimistic on growth, with GDP growth expected to average over 7% in both H2 FY25 and H1 FY26. The Governor stressed the need for maintaining the balance between growth and inflation, as aligning inflation durably to the target is necessary for sustainable growth,” said Aditi Gupta, economist at Bank of Baroda.
The balanced tone of Shaktikanta Das in RBI policy
While there are the goods and bads that you can take from RBI’s stance on growth and inflation, what Das’ team did finely though is it balanced its communication.”The RBI successfully balanced its communication today between – “cautiously monitoring growth” while focussing on achieving price stability. It argued that durable disinflation is essential for boosting consumption and growth in the economy. Although, at the margin, the tone of the policy announcement was dovish, with the RBI recognising that a “growth slowdown – if it lingers on beyond a point – may need policy support,” HDFC Bank said in a note.
The balanced tone comes close on the heels of one of India’s most significant GDP growth shortfalls in recent memory, potentially adding to the pressure on Shaktikanta Das, whose term is set to expire on December 10 and there is still no news on his likely extension.
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Despite his accolades and steady leadership, Das is concluding his six eventful years at the RBI on a challenging note: missing inflation targets, facing controversy over inflation computation stirred by senior ministers, grappling with criticism for failing to recognize slowing growth, and implementing strict measures to address loan bubbles that have exacerbated the consumption slowdown.
The governor’s statement today reassured how India is a shining star on the global growth front, no matter the big cut in growth bets for this fiscal year and the MPC taking note that the near-term inflation and growth outcomes in India have turned somewhat adverse since the October policy.
Shaktikanta Das said that despite recent deviations in growth and inflation trajectories, India’s economy remains on a steady and balanced path of progress. As the global economy undergoes significant changes, India is well-placed to capitalise on emerging trends and continues to advance on a transformative journey.
India’s real GDP growth slowed to 5.4% in the second quarter, much lower than expected, the governor acknowledged. However, he said, this drop was mainly due to a sharp slowdown in industrial growth, which fell from 7.4% in the first quarter to 2.1% in the second. The decline was driven by weaker manufacturing performance, reduced mining activity, and lower electricity demand. However, the weakness in manufacturing was not widespread but concentrated in specific sectors like petroleum products, iron and steel, and cement, Das justified.
Sweet sour food prices for Shaktikanta Das
On inflation too, Das had some mixed bag comments.
“The medium-term prognosis on inflation suggests further alignment with the target, while growth is expected to pick up its momentum,” Das said while also raising the inflation forecast – meaning Indians should brace for more intense price pressures.
But, Das also said, the recent spike in inflation highlights the continuing risks of multiple and overlapping shocks to the inflation.
While retail inflation in October quickened at the fastest pace in over a year, food prices spiked to a 15-month high of 10.9%, lifting retail inflation beyond the RBI’s target of 4% and even its tolerance band of 2-6%. Inflation has pressured businesses by shrinking profit margins and forcing price hikes, while also impacting consumers, who have cut back on spending.
Also Read: 10 things Shaktikanta Das said on inflation that Indians must take note of
Das today cautioned that food inflation is expected to stay high in the third quarter due to supply issues and unpredictable crop yields. However, he noted it should ease in the fourth quarter as the Rabi harvest reaches the markets. Again, rising instances of extreme weather, growing geopolitical uncertainties, and financial market volatility add to the upward risks for inflation, the central bank said.
The cost of home-cooked vegetarian and non-vegetarian thalis rose by 7.2% and 1.8%, respectively, in November compared to the previous year, according to a CRISIL report. Policymakers continue to grapple with the challenge of high food inflation.
Shaktikanta Das and his team at the RBI have delivered a carefully choreographed policy, acknowledging the twin storms of slowing growth and stubborn inflation. With a mix of realism and reassurance, the central bank’s balanced tone underscores its resolve to steer India’s economy through murky waters, even as uncertainty looms large over the horizon.