https://www.thehindubusinessline.com/opinion/editorial/missed-opportunity/article68955314.ece
A rate cut now would have helped support growth
So, the Reserve Bank of India’s Monetary Policy Committee has chosen to bat for price stability even while acknowledging that there is a slowdown in growth — the projection for FY25 has been marked sharply downward to 6.6 per cent from 7.2 per cent in the last policy. While this decision may be dictated by the Flexible Inflation Targeting framework — something that Governor Shaktikanta Das, explained in great depth in his remarks prefacing the policy announcement — the risk is that the central bank is falling behind the curve in the matter of striking the right balance between inflation and growth.
An opportunity may well have been lost in reviving consumption demand and nudging companies to invest, with even a small 25 basis point rate cut in this policy. The central bank’s optimism about growth for the rest of the year stems from hopes of strong festive demand in the third quarter, healthy agricultural output boosting rural demand, revival in construction, mining and industrial activity after the completion of monsoons, and government spending being backloaded this year. But the RBI appears to be brushing aside the signs of tepid urban consumption, which is visible in muted growth in GST collections, slowing retail loans and consumer goods sales. With a large part of post-pandemic consumption being backed by credit, elevated policy rates will continue to play spoilsport on this front.
While the reduction in CRR is expected to inject an additional ₹1.16 lakh crore, the use of this liquidity will be at the discretion of banks. It may not have an immediate impact on the cost of borrowing in the economy. An unstated factor behind the MPC’s decision to hold rates could be the threat to capital flows and currency following Donald Trump’s swearing in as President of the United States of America. A strengthening dollar, and disruptions in global supply chains and trade due to growing protectionism could hurt not just the currency and capital flows, but growth as well.
The inflation numbers projected by the RBI, however, leave room for policy rates to move lower in the next MPC meeting in February. While the CPI inflation for the third quarter has been revised higher to 5.7 per cent, it is projected to move lower in the fourth quarter with inflation for FY25 projected at 4.8 per cent, which is well within the band laid down by the FIT regime. Though the monetary policy sounded sanguine about the external sector and CAD, continued foreign portfolio outflows are beginning to impact the foreign exchange reserves as well as the rupee, which is hitting new lows almost every other day. The measure to increase the interest rate threshold for FCNR(B) deposits appears intended to increase capital flows into the country and support the external account. But given that banks currently offer interest rates much below the threshold on these deposits, it remains to be seem if the additional leeway has the intended effect.
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