At its 50th meeting, the Monetary Policy Committee could perhaps have reviewed its liquidity stance of ‘withdrawal of accommodation’ — one that it has maintained for well over a year. A chance to support growth may well have been missed here. The central bank’s projection of 7.2 per cent growth for FY25 does appear on the optimistic side given the vagaries of the ongoing monsoon, the corporate earnings slowdown in Q1 and unfolding global events. A change in stance now would have made it possible for a rate cut later this calendar year, if the growth impulse turned weak. This reasoning seems to have prompted two of the six MPC members to take a contrary, dovish stance at the June meeting and this one. Private investment needs a fillip more than ever.

The Reserve Bank of India (RBI) remains focused on retail inflation, citing “price stability” as the bedrock for growth. For an inflation-targeting central bank that has fixed for itself a 4 per cent target, the current levels are elevated. But the rise now is driven by food and is not generalised (7.5 per cent in FY24 and 9.4 per cent in June, with the headline rate at 5.4 per cent and 5.1 per cent, respectively). The RBI fears that food prices may elevate inflationary expectations. It has significantly termed food inflation as “persistent” and not “transitory”. This is something of a puzzle, given that the RBI has, in fact, taken a sanguine view on monsoon driving growth prospects, with signs of an uptick in kharif sowing and the impact of La Nina oceanic currents later this year presumably lifting rabi output.

If food inflation remains ‘persistent’ despite this situation, it calls for more research into why this is so, and whether it is a subject for the RBI or the government to handle. In sum, the RBI’s inflation reading is a bit fuzzy. It is also odd for the monetary authorities to take a sanguine view on growth on the basis of the monsoon at present being at 107 per cent of long-period average when there have been regional variations. An underwhelming kharif like last year could impact growth overall. A vigil on inflation would perhaps not have been compromised by relaxing the liquidity stance to neutral to lift sentiments. The prospect of global rates being eased allows the RBI to relax its stance without outflow worries.

Besides being convinced that growth does not need a rate stimulus, it is also possible that RBI wants to shore up deposit rates at a time when credit growth has been outpacing deposit growth. It has been a matter of some concern that banks have been tardy in transmitting the 250 bps increase between May 2022 and February 2023. However, banks seem to be running up against structural limits to attracting deposits at a time when gold, property, mutual funds (where banks too have entered the fray) and equities are proving to be attractive. These factors give rise to larger questions of intermediation of savings and investments. Technological and structural shifts have given rise to a fresh set of policy challenges.