RBI announced today the meeting of fifty second meeting of the Monetary Policy Committee (MPC) held during December 4 to 6, 2024. The MPC kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent. The minutes showed that MPC member Nagesh Kumar noted that since the October 2024 MPC Meeting, economic conditions have worsened dramatically on both economic growth and inflation fronts. The decline in the Q2 2024-25 growth numbers from 8.2% achieved in 2023-24 and from 6.7% on Q1 2024-25 to just 5.4% is much sharper than expected. The slowdown has led to the downgrading of the GDP growth forecasts for 2024-25 by most analysts from around 7% earlier to around 6.5% now. The RBI has downgraded it to 6.6% from 7.2% earlier. The extent of the slowdown is serious enough to warrant policy attention. The slowdown largely reflects the weakness of the industrial sector. The growth rate of agriculture value added has actually improved from 2.0% in Q1 2024-25 to 3.5% in Q2.

Saugata Bhattacharya noted that among the multiple economic and financial developments informing a difficult voting decision, extracting interpretable signals from the set of factors underlying the unexpectedly sharp Q2 FY25 real GDP growth slowdown was, square and centre, the primary one. RBI nowcasts show a revival in Q3 growth outlook consistent with its FY25 GDP 6.6% forecast. Both data and surveys also point to expectations of an improving growth – inflation balance in the second half of FY25. Yet, we also note that some indicators keep alive niggling doubts.

Ram Singh noted that though elevated, the inflation trajectory remains along the projected/expected lines. As we advance, food inflation is likely to soften in Q4:2024-25, and energy prices are also expected to be stable in the near future. Overall, CPI inflation for 2024-25, projected at 4.8 per cent, is within the tolerance band though above the 4.0 per cent target. The risks are evenly balanced.

Rajiv Ranjan highlighted that the inflation-growth balance turned adverse since the last policy in October. While inflation has surprised on the upside, growth has also surprised on the downside. As per our assessment, both are likely to reverse their course in the near future. At this juncture, confirmation of durable softening of inflation in the coming months is important. The need of the hour is to be watchful of the forthcoming data to ascertain the projected improvement in the balance between inflation and growth outlook.

Michael Debabrata Patra stated that with the prospects for private consumption expected to improve over the rest of the year, the key is to get investment going, since exports are hostage to a difficult external environment. Private investment will want to see a robust revival of domestic demand to draw in the slack that it is now experiencing. The monetary policy stance is open to support growth, but it must await the ebbing of inflation on a durable basis or else the uneven progress made so far in disinflation will get dissipated.

Shaktikanta Das RBI governor back then, noted that the Indian economy remains resilient, notwithstanding the lower GDP data for Q2 of 2024-25. The direction of inflation is downwards, although the path is interrupted by periodic humps due to food inflation. As a result, the inflation growth balance has got somewhat unsettled now. The policy priority at this critical juncture has to be on restoring the inflation-growth balance. The fundamental requirement now is to bring down inflation and align it with the target. Lower inflation will enhance disposable income with households and increase their purchasing power. Such an approach would support consumption and investment demand.

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