The latest GDP (Gross Domestic Product) print, which shows the economy growing by just 5.4 per cent in real terms in the second quarter of FY25, is likely to put the Monetary Policy Committee (MPC) and the Reserve Bank of India (RBI) in a quandary. In its last two meetings, the MPC kept policy rates on hold based on a sanguine view of the economy. Taking the line that India’s growth outlook is resilient supported by brisk kharif sowing, festival spending and healthy credit growth, it projected growth at 7.2 per cent for FY25, with Q1 and Q2 projections at 7.3 and 7.0 per cent, respectively.

But actual GDP numbers in the last two quarters have undershot these estimates by 60 and 160 basis points respectively, with full-year growth now expected at 6-6.5 per cent. Capex has lagged targets, festival spends have been muted and bank non-food credit growth has dwindled to 11.5 per cent in October 2024 from 20 per cent a year ago. High-frequency data on GST collections, core output and manufacturing PMI suggest that while economic activity may have bottomed out in September, the pickup thereafter has been underwhelming. All these present a strong case for MPC to ease its rate stance right away to support growth.

To be sure, easing rates at this juncture is not an easy call to take. Under the monetary policy framework, MPC is committed to keeping Consumer Price Index (CPI) inflation within the 2 to 6 per cent band. With vegetable prices soaring, CPI prints were at 5.49 per cent and 6.21 per cent in September and October. November numbers are expected to remain elevated, with a decline from December onwards dependent on rabi prospects. Added to this is uncertainty around what Trump tariffs and policies will do to capital flows and the rupee. However, weighed against such considerations is the fact that monetary policy has a limited role to play in curbing food prices, which are mainly propelled by supply shocks. On capital flows, FPIs have already been on a selling spree, pulling out $14 billion (net) over October and November. Given that the threat of tariffs and Trump’s policies are likely to persist for the next four years, there seems to be little point in the MPC waiting for this risk to abate. Having built up a forex war-chest of over $656 billion, RBI has been at pains to assert, in recent MPC meetings, that it pursues an independent monetary policy uninfluenced by US actions or forex flows. With the economy needing attention, this may be the time to walk the talk.

Granted, only shallow rate cuts may be possible at this juncture but even this can have a positive signalling effect for the economy. Lower EMIs (Equated Monthly Instalments) can nudge households sitting on high leverage to resume big-ticket purchases. India Inc may take cues from the improved demand to dust off capex plans. Lower rates can lighten the interest burden on the fisc, allowing the government to catch up on its lagging capex. Overall, the benefits of easing rates sooner, rather than later, seem to outweigh the risks.

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