INFLATION AT CENTRE

• In its December meeting, the Monetary Policy Committee (MPC) upheld its focus on inflation control amidst slowing growth, maintaining the repo rate at 6.5% and a neutral policy stance. Despite mounting pressure from the government and market participants for a rate cut, the RBI prioritized price stability, echoing Governor Shaktikanta Das’s assertion that sustained growth requires a foundation of stable prices.

Growth Slowdown and Resilient Outlook:

• India's GDP growth decelerated to a multi-quarter low of 5.4% in the second quarter, below the RBI's earlier projection of 7%. However, the central bank remains optimistic about recovery:
• Growth is forecasted to rebound to 6.8% in Q3 and 7.2% in Q4, driven by factors such as festive demand and improving rural activity.
• This cautious optimism reflects the belief that the slowdown is transitory, supported by measures like the cash reserve ratio (CRR) cut, which enhances liquidity in the banking system and bolsters lending.

Inflation Risks and Projections:

• While growth shows signs of recovery, inflation remains a pressing concern:
• Retail inflation, currently elevated, is projected to ease to 5.7% in Q3 and 4.5% in Q4, with alignment to the 4% target expected by the second quarter of the next fiscal year.
• Key drivers of moderation include:
  • Seasonal corrections in vegetable prices.
  • Arrivals from the kharif harvest.
  • A robust rabi output and adequate cereal buffer stocks.

External and Domestic Uncertainties:

• Global Environment:
  • The election of Donald Trump and his potential tariff policies have increased market volatility, heightening risks for emerging economies like India.
• Domestic Factors:
  • The upcoming Union Budget (February 1) will provide insights into fiscal policy, influencing monetary policy decisions in the subsequent MPC meeting.
  • By then, food price trends will offer clarity on inflation trajectory, enabling the MPC to reassess its stance.
• Looking Ahead:
  • The RBI’s decision to maintain status quo underscores its dual mandate of controlling inflation and supporting growth. While it is prepared to act if inflation aligns with its expectations, the evolving global and domestic environment necessitates vigilance.
  • If inflation moderates as projected, the possibility of policy easing in the near term could offer much-needed support to growth without jeopardizing macroeconomic stability.
• Conclusion:
  • In the delicate balancing act between growth and inflation, the MPC has opted for prudence. Its cautious optimism reflects a belief in the resilience of the Indian economy, even amidst headwinds.
  • Sustained economic recovery, however, will require coordinated efforts in both fiscal and monetary domains, as well as adaptability to an uncertain global landscape.