A Strategic Balancing Act in RBI's Monetary Policy

Ensuring Growth and Stability Amid Inflationary Pressures

The decision that reflects a strategic balancing act in the complex economic landscape is that by the Reserve Bank of India, which decided to keep the policy repo rate unchanged for the tenth consecutive meeting, dated October 9, 2024, at 6.50%. The RBI does not solely focus on taming inflation by keeping this rate but focuses on fostering a conducive environment to propel growth in a sustainable manner—a move which pretty much rhymes with the current economic realities facing India.

A Call for Stability Amidst Inflationary Pressures

The last repo rate hike was in February 2023, when the inflationary pressures were rising. Ever since, the RBI has steered through a sea of economic challenges, reflecting the strengths of its flexible inflation targeting monetary policy framework. The approach has completed eight years now and emerged as one of the key structural reforms in the Indian economic architecture. Immediate and forecasted real GDP growth of 7.2% for the year 2024-25 could be indicative of the MPC's confidence about the structural underlying strength of the Indian economy, amidst external pressures.

Inflation, especially food and fuel prices, is the congenital bugbear, though. Even as the RBI has estimated CPI inflation at 4.5% for FY25, recognition of upside risks emanating from volatile prices is a pragmatic acceptance of the risks lying ahead. The governor, Shaktikanta Das, aptly described the managing of inflation as being akin to catching a horse-one that had to be constantly held in leash-eloquently summing up the tightrope the RBI would have to walk. It is essential that the central bank remains vigilant and ahead in its strategy so that the boilers do not allow the attained gains in inflation control to roll back due to unpredictable circumstances.

Growth Projections and a Positive Outlook The growth prospects assessment by the MPC came optimistic. Though the growth projection for Q2 FY25 has been revised downwards to 7.0%, the expected rebounding momentum in the subsequent quarters to 7.4% indicates a very strong recovery path. This resilience of growth, led by strong domestic consumption and a revival in investment, reinforces the premise that the Indian economy is well on its path toward sustained recovery. This optimism is further cushioned by the expected improved agricultural output and favorable weather conditions.

What is more significant, though, is the shift in stance by the MPC to 'neutral'. This now leaves room for interest rate cuts in the future, aligned with emerging circumstances. It reflects a willingness to adapt to new information and conditions, which is essential in today's rapidly changing global environment.

The Imperative for Responsible Growth While the general health of the banking and NBFCs looks healthy, there are warning signals that cannot be ignored. According to the Governor, one such red flag is the fact that some NBFCs are pursuing growth at any cost without due risk management. A 'growth at any cost' culture or attitude is inviting bankruptcy, and hence it needs to be avoided. Emphasis by the RBI on self-correction by these institutions is of paramount importance: early action is required to mitigate the risk being created by high-cost lending.

Second, the proposals-in regards to consumer protection, especially with regard to pre-payment penalties-for small and micro enterprise borrowers, are indicative of good intentions to not allow growth at the expense of consumer welfare. By allowing verification features for fund transfers, the RBI is addressing another critical need for securities in financial transactions in today's digital economy.

Future Outlook and Managing a Complex Terrain Henceforth, the dovish stance of the RBI will play an important role in balancing growth with inflation. Emphasis by the central bank on tracking the macroeconomic indicators, along with a flexible monetary policy, would be highly crucial in order to tide over the prospective geopolitical tensions and climatic uncertainties.

A rate cut in December is still contingent upon the state of the economic indicators. And if these are still flashing weakness, there might be little space for the RBI to do other than make a reversal in its stance to support growth. But the other way around, if the economy keeps on gaining pace, it would be sensible to wait until early 2025. It is this balance that the RBI wants to achieve in an enabling environment for investments and consumer spending, which is an essential starter for the wheels of economic stability in the long run.

Anamika Singh

#RBI #MonetaryPolicy #EconomicGrowth #InflationManagement