RBI’s monetary policy decisions aim to balance inflation control and economic growth

Source: The post India’s Manufacturing Growth and Challenges it Faced has been created, based on the article “Staying the course: The RBI has done well to stay focused on inflation amid rate cut clamour” published in “The Hindu” and the article “MPC FOCUSES ON STABLE INFLATION, LIQUIDITY BOOST” published in “Live mint” on 7th December 2024

UPSC Syllabus Topic: GS Paper3- Economy-growth, development and employment

Context: The article discusses the RBI’s monetary policy. It highlights the decision to keep interest rates unchanged but lower the cash reserve ratio to improve liquidity. The RBI revised GDP growth and inflation forecasts downward due to weak consumption and investment. It emphasizes balancing inflation control with growth, while expecting improved economic conditions in the second half of the year.

For detailed information on Monetary Policy Transmission read this article here

What decisions did the RBI’s MPC make?

1. Interest Rate: The MPC kept the benchmark interest rate unchanged at 6.50% for the 11th consecutive time.
2. Focus: The MPC maintained a neutral policy stance, balancing inflation control and growth support.
3. CRR Reduction: To improve liquidity, the RBI reduced the cash reserve ratio (CRR) by 50 basis points to 4%, releasing ₹1.16 trillion liquidity in two phases.
4. Growth Forecast: The RBI lowered the GDP growth forecast for FY25 to 6.6% from 7.2%, and for Q1FY26 to 6.9% from 7.3%.
5. Inflation Target: The FY25 inflation forecast was revised upward to 4.8% from 4.5%, reflecting food price spikes.
6. Support Measures: Liquidity measures like OMOs and activity in the NDF market were enhanced to stabilize the economy.

How Has Inflation Affected the Economy?

1. Rising Prices: Inflation spiked in September and October due to high food prices, impacting household spending.
2. Lower GDP Growth: Q2FY25 GDP growth fell to 5.4% from an earlier estimate of 7%, driven by weak private consumption and investment.
3. Impact on Urban Spending: High inflation reduced households’ spending power, affecting urban consumption
4. Balanced Risks: While inflation risks remain due to adverse weather and global price hikes, cooling measures like the kharif harvest are expected to help.

What are the risks and expectations?

1. Risks include global commodity price rises, adverse weather, and geopolitical uncertainty.
2. The RBI expects inflation risks to remain balanced.
3. Liquidity support measures, like OMOs, are expected to continue in Q1CY2025.
4. A rate cut cycle may start in February 2025 with a 50 bps reduction.

How is the economic situation evolving?

1. Domestic economic activity rebounded post-Q2FY25, helped by the festive season and rural demand.
2. The RBI remains hopeful of GDP recovery and inflation cooling in H2FY25.
3. The government may consider steps like rolling back import duties on edible oils to ease inflation and boost consumption.

Question for practice:

Discuss how the RBI’s monetary policy decisions aim to balance inflation control and economic growth in the current economic scenario.