The Monetary Policy Committee (MPC) meeting this week decided to stick to its guns on rates for the tenth consecutive time, holding the repo rate at 6.5 per cent, while softening its stance on liquidity from ‘withdrawal of accommodation’ to ‘neutral’. The changed stance on liquidity will not move the needle much, because market interest rates have already trended down in recent months on the back of improving liquidity and ample foreign portfolio inflows, which have moderated the long end of the yield curve. The MPC has justified its 5:1 decision on holding rates with hawkish commentary on inflation, accompanied by a sanguine view of India’s economic prospects.

However, incoming data suggest that the growth momentum is a cause for concern. There is a risk of the MPC falling behind the curve in easing policy rates in time to support the economy. The MPC has chosen to stay with its optimistic real GDP growth projection of 7.2 per cent for FY25, same as in the August review. The Economic Survey as well as many private forecasters peg India’s real growth at 6.5-7 per cent this fiscal. The MPC cites a healthy kharif crop bolstering rural consumption, besides strong business and consumer confidence and improving global trade as supporting factors. However, many high-frequency indicators have been signalling a slowdown in India’s growth momentum in the last three months, stretching beyond the general-election-effect. Core sector output contracted in August, while automobile and tractor sales shrank in August and September. Growth in GST collections slowed to a 40-month low of 6.5 per cent in September. Both manufacturing and services Purchasing Manager Indices have receded from peaks. For Q1 FY25, India Inc reported its slowest pace of profit growth in four years.

While the above-normal monsoon will likely lift agricultural output, the two largest economies in the world are grappling with slowdown fears, creating disinflation risks for commodities. These risks can spill over to India. In Q1, GDP growth at 6.7 per cent significantly undershot the MPC’s projection of 7.1 per cent. Given that rate cuts usually impact the economy with a two or three quarter lag, a cut now would have been timely. In fact, two exiting members of the MPC argued in the August meeting that high real rates were holding back the economy from growing at its true potential.

On inflation, the last two CPI prints at 3.6 and 3.65 per cent have been below the 4 per cent target. While the MPC expects a ‘big jump’ in September, it also admits that food inflation may ‘sequentially moderate in Q4’ due to a healthy kharif harvest, ample buffer stocks and a good rabi season. Yes, geopolitical risks which can flare up oil or industrial commodities remain a risk. But these are ever-present and it is moot if they can be quelled through monetary policy. With its all-out efforts to keep the inflation horse stabled, the risk is that the MPC might end up doing the same to the growth horse.

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