RBI Maintains Rate Amid Economic Challenges
The Reserve Bank of India (RBI) has decided to keep its policy rate unchanged at 6.5% for the 11th consecutive time. This decision comes as the central bank faces a challenging economic landscape. Alongside maintaining the rate, the RBI has cut its economic growth forecast for the fiscal year 2024-25 from 7.2% to 6.6%. Additionally, the RBI has reduced the cash reserve ratio (CRR) by 50 basis points to 4%. This move is expected to release approximately ₹1.6 lakh crore into the banking system, potentially easing lending rates for consumers and businesses.
Economic Growth Forecast Adjusted
The RBI’s decision to lower the growth forecast reflects a significant slowdown in economic activity. The second quarter of the fiscal year saw growth plummet to 5.4%, marking a seven-quarter low. This decline has raised concerns among policymakers and economists alike. RBI Governor Shaktikanta Das acknowledged the challenges, stating that inflation has been on the rise while growth has moderated. The Monetary Policy Committee (MPC) adopted a cautious approach, emphasizing the need for better visibility on both growth and inflation before making further adjustments.
Das noted that the slowdown in domestic economic activity appears to have bottomed out in the second quarter. He expressed optimism that growth would gather pace in the upcoming quarters, driven by strong festive demand and a resurgence in rural activities. The agricultural sector is expected to benefit from healthy kharif crop production, improved reservoir levels, and better rabi sowing. Industrial activity is also anticipated to normalize, contributing to a more robust economic outlook.
Inflation Projections and Policy Implications
In conjunction with the growth forecast adjustment, the RBI has raised its inflation projection for the fiscal year 2024-25 from 4.5% to 4.8%. This increase underscores the persistent inflationary pressures affecting the economy, particularly in the food sector. Governor Das emphasized the importance of inflation targeting, stating that the RBI must adhere to its legal mandate to focus on headline inflation rather than core or food inflation.
The MPC meeting revealed a split in opinions, with two members advocating for a rate cut while four supported maintaining the current rate. This division reflects the ongoing debate about the appropriate response to the economic situation. Senior government officials have called for rate cuts, arguing that high food inflation is largely due to supply-side issues and weather-related factors. However, Das reiterated that the RBI’s primary responsibility is to target headline inflation, as mandated by law.
Future Outlook and Government Collaboration
Looking ahead, Das expressed confidence that the economy would recover in the coming quarters. High-frequency indicators suggest a rebound in economic activity, supported by festive demand and rural growth. The RBI’s decision to cut the CRR is expected to enhance liquidity in the banking system, facilitating lending and potentially stimulating economic growth.
The RBI is in regular discussions with the government regarding inflation and supply-side challenges. Das highlighted the importance of collaboration between the central bank and the government to address these issues effectively. As the economy navigates these turbulent waters, the RBI’s cautious yet proactive stance aims to balance growth and inflation, ensuring stability in the financial system.
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