Despite considerably lower growth estimates and widespread calls for interest rate cuts to promote growth, the monetary policy committee (MPC) will find it difficult to reduce rates.
Lower-than-expected Q2 GDP growth of 5.4 percent has boosted pressure on the RBI's MPC to lower interest rates, even as bond yields fell on Friday due to expectations of a softer policy.
The government has also put pressure on the rate-setting panel, with commerce minister Piyush Goyal urging that food prices be omitted and finance minister Nirmala Sitharaman calling for lower interest rates to stimulate investment and growth.
While monetary policy cannot affect the prices of tomatoes, onions, or potatoes, it can reduce demand and lower total prices, hence lowering headline inflation.
According to Shreya Sodhani, an economist at Barclays, the RBI is projected to maintain policy rates unchanged this week amid weaker growth, with a focus on price stability. "We highlighted that a weaker-than-expected Q3 GDP print may prompt the MPC to ease monetary policy, but the timing would depend on the outlook of growth and inflation," Sodhani added.
In the October MPC meeting, Nagesh Kumar was the only one of the three newly appointed external members to call for an immediate 25 basis point rate drop. In August, outgoing members Jayanth Varma and Ashima Goyal voted in favor of a rate drop. Varma was a staunch advocate for reduced interest rates, claiming that the current rate regime inhibits India's growth potential.
"The forecast for the second half of Fiscal Year 25 is obviously mixed. We expect rural demand to strengthen due to strong rise in kharif foodgrain output and an optimistic forecast for rabi crops with restored reservoir levels, as well as expectations of a back-end pick-up in government expenditure," Aditi Nayar, chief economist at Icra, said. However, given the recent surge in prices, Icra anticipates the MPC to decrease interest rates as soon as possible in February if inflation falls.While few expect the RBI to lower the repo rate, there is hope that it would take steps to ease liquidity and lower interest rates in the money market.
