Clipped from: https://www.thehindubusinessline.com/opinion/restoring-balance-between-inflation-and-growth/article68956021.ece
The MPC’s decision to keep repo rates unchanged was expected. GDP growth in FY25 is likely to touch 6.5%
The December 2024 policy review was conducted in an unenviable backdrop. In October 2024, the headline CPI inflation had surged to 6.2 per cent, above the upper threshold of the Monetary Policy Committee’s (MPC’s) medium-term target range of 2-6 per cent.
Further, the GDP growth had decelerated to a lower-than-expected 5.4 per cent in Q2 FY2025, complicating monetary policy decision making.
In this context, the MPC’s decision to keep the repo rate unchanged was along expected lines, with inflation targeting warranting a pause with the CPI inflation as high as 6.2 per cent, and the neutral stance permitting this flexibility. Notably, this decision was not unanimous, with two of the three recently introduced external members of the Committee voting for a rate cut in the December 2024 review.
Inflation forecast
The CPI forecast for FY2025 was raised to 4.8 per cent in the December 2024 policy meeting, as we had anticipated. The MPC estimates the headline inflation to moderate from an unpleasant 5.7 per cent in Q3 FY2025, to 4.5-4.6 per cent in the next two quarters, before printing at 4.0 per cent in Q2 FY2026, i.e. at that much awaited mid-point of its 2-6 per cent range.
Simultaneously, the Committee undertook a large downward revision of its FY2025 growth forecast to 6.6 per cent from 7.2 per cent amidst uneven domestic consumption and omnipresent global uncertainties, heightened further by the threat of tariffs.
From the surprise low of 5.4 per cent in Q2 FY2025, it projects GDP growth to rise to 6.8 per cent in Q3 FY2025 and 7.2 per cent in Q4 FY2025, before dipping to 6.9 per cent in Q1 FY2026 and reversing to 7.3 per cent in Q2 FY2026, presumably aided by the low base.
Growth path
Our own baseline view is that with some transient headwinds easing, India’s GDP is likely to expand by around 6.5 per cent each in FY2025 and FY2026, within our potential growth estimate of 6.5-7.0 per cent.
Interestingly, the RBI announced that the CRR is being reduced by 50 bps in two tranches in December 2024 itself, to infuse liquidity of ₹1.16 lakh crore. This would help restore the balance between inflation and growth, in our view, and is a fairly strong signal that policy support could imminently shift towards supporting the latter.
Looking beyond the October 2024 CPI print, the daily data on retail prices of food items for November 2024 is relatively benign, suggesting that food inflation is likely to have eased sequentially in that month.
We project the November 2024 headline CPI inflation at 5.5 per cent, i.e. below the 6.0 per cent threshold but still unacceptably elevated. We anticipate the CPI inflation to retrace to around 5.0 per cent in December 2024. This is the last CPI print that will be available before the MPC’s February 2025 review.
By then, the MPC would also be in a position to gauge the outlook for the rabi crop and its impact on food inflation.
While we will only get the next quarterly GDP print along with the revised numbers for Q1 and Q2 at the end of February 2025, the first advance estimate for GDP growth for FY2025 would have been released by the NSO in early January 2025.
Additionally, with the Trump Presidency underway, there may be some modicum of clarity on the threat of tariffs, and its potential impact on Indian growth, the next time the MPC meets as per its planned schedule.
In our view, if no new risks have emerged that threaten the anticipated deceleration in the trajectory of inflation to 4.0 per cent by Q2 FY2026, the likelihood of a repo rate cut in February 2025 would be fairly high.
The writer is Chief Economist, Head- Research & Outreach, ICRA
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