Foreign banks anticipate that the Reserve Bank of India (RBI) will maintain the policy rate at 6.5 per cent during the December 4-6 MPC meeting, despite the second-quarter GDP growth slowing to 5.4 per cent. The weaker growth data poses a challenge for the central bank, intensifying calls for a potential shift toward monetary easing.

Concerns around elevated inflation and uncertain global conditions may prompt the RBI to refrain from cutting policy rate, said economists from these entities. The central bank has kept policy rates unchanged since February 2023. 

At 5.4 per cent for the quarter ended September 30, 2024, India clocked the slowest quarterly economic growth in seven quarters beginning October-December 2022. The latest GDP print undershot consensus and was much lower than the 7 per cent Q2 GDP growth that RBI forecast on October 9. 

Slowdown in capex

Part of the reason for the disappointing Q2 GDP growth could be the slowdown in Central government capex. The Centre’s capex in October 2024 stood at ₹ 51,579 crore, which was 10 per cent lower than spend of ₹ 56,296 crore in October 2023. 

Shreya Sodhani, Regional Economist, Barclays, highlighted that in a quarter marred by excess rainfall, lower government capex and weak urban demand, the country’s real GDP growth slowed materially to 5.4 per cent from 6.7 per cent in April-June 2024. Gross value added (GVA) growth slowed too, to 5.6 per cent in Q2 from 6.8 per cent in Q1. “Despite Friday’s growth print being significantly weaker than RBI’s expectations, we think primacy of inflation will prevail for now. Despite some pullback in food prices in early November, we now expect the RBI MPC to stay on hold in the upcoming December policy meeting (next week on December 6) and retain the repo rate at 6.5 per cent alongside a neutral stance”, Sodhani said in a research note post the September 2024 quarter GDP announcement on Friday.

Possibility of dissent

However, Sodhani noted that the MPC decision at the upcoming meeting will not be unanimous and think it is likely that more than one member may dissent in the meeting.

Barclays Research has also now post the Q2 GDP numbers release lowered its FY24-25 growth forecast for India to 6.5 per cent from 6.8 per cent. However, it is of the view that this growth slowdown is likely to be short-term. 

Radhika Rao, Executive Director and Senior Economist, DBS Bank noted that a RBI MPC pause is likely in December 2024, with a forward-looking policy bias to see room to lower rates in early 2025. She highlighted that the MPC continues to maintain a cautious posture, highlighting limited room to cut rates in the face of above-target inflation. 

Goldman Sachs Chief Economist Santanu Sengupta, in a research note dated November 29 (prior to the release of Q2 GDP data), suggested that the MPC might consider a 25 basis point rate cut in the December meeting if the Q2 GDP figures significantly underperform the foreign brokerage’s expectations.

Goldman Sachs had forecast Q2 (September 2024 quarter) GDP growth at 6.4 per cent, but the actual has turned out to be 5.4 per cent. On a base case, Goldman Sachs expects a cautious and shallow monetary policy easing cycle of 25 basis points in February, followed by another 25 basis points in April next year by the RBI.

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