Banking Central | Third quarter GDP numbers make a strong case for continued policy support

RBI may continue with rate cuts to support growth

The modest third-quarter GDP growth number is yet another reminder for the policymakers to urgently look for ways to support growth, which will require a joint effort by monetary and fiscal policymakers.

India’s economy expanded to 6.2 percent in October-November from 5.6 percent in the previous quarter, underscoring the need for more decisive monetary easing by the Reserve Bank of India’s monetary policy committee (MPC).

Let's look at the growth scenario for what it is: though higher government spending, a pickup in private consumption, and improved net exports helped cushion the slowdown, the pace of growth remains well below the desired level. The gap raises concerns about growth momentum holding up in the coming quarters, particularly as fiscal support is set to taper off.

Higher actual GDP growth translates to more economic activity, more jobs and more consumption and vice versa. India, with millions entering the job market every year, is not creating enough jobs to accommodate all of them. This needs to change or we will walk into a job crisis.

Incremental policy measures — such as the 25 basis point repo rate cut in February and another expected in April — appear insufficient.

More robust monetary easing is needed to lower borrowing costs further, stimulate private investment and boost consumer spending. These actions will help bridge the gap between current performance and the higher growth required for a stable recovery.

Mounting global trade tensions and tightening of financial conditions add to the challenge, making it imperative for the RBI to adopt an "accommodative" stance to provide the additional support needed to sustain economic activity.

MPC Minutes show pro-growth tilt

A pro-growth tilt is evident in the minutes of the February meeting of the monetary policy committee led by Sanjay Malhotra, his first policy review after taking over as the RBI governor.

The minutes signal a decisive shift in focus — from an unwavering battle against inflation to a more balanced approach that accommodates growth. Malhotra made a compelling case for monetary easing, with his vote for a 25-basis point rate cut, the first in almost five years,  marking a pivotal moment in India’s monetary policy stance. His reasoning is difficult to dispute.

Baking Central

Malhotra’s confidence in the disinflationary trajectory is well-founded. After breaching the RBI’s upper tolerance band of 6 percent in October, headline inflation has moderated, with food prices showing clear signs of easing. A robust kharif harvest, seasonal correction in vegetable prices and a promising rabi crop outlook further bolster the view. Fiscal consolidation and budgetary measures aimed at supporting agriculture reinforce expectations of continued price stability.

With consumer price index (CPI) inflation projected at 4.2 percent for 2025-26 — comfortably within the RBI’s target range — the justification for a restrictive policy stance weakens considerably.

If inflation is expected to align with the target, maintaining an unnecessarily high rate risks stifling growth at a crucial juncture.

Malhotra rightly pointed out that a lower policy rate would bolster household consumption, housing investments and capital expenditure — key drivers of aggregate demand. Given that inflation is trending downward while growth requires support, monetary easing is not just advisable but essential.

Not only Malhotra, but his MPC colleagues, too, acknowledge the growth concerns. Deputy governor Rajeshwar Rao said, “The current environment is replete with uncertainties”, as he called for a flexible approach to the monetary policy. This aligns with Malhotra’s stance —while caution is warranted due to global financial volatility, trade disruptions and climate-related risks, excessive conservatism could prove counterproductive.

Rajiv Ranjan, another MPC member, said with the Budget sustaining public investment and offering tax concessions to boost disposable incomes, monetary policy must now do its part.

Another panel member, Saugata Bhattacharya, echoed the sentiment. “I am now cautiously optimistic about the downward trajectory of inflation… The required policy response on the inflation-growth trade-off seems skewed in favour of the latter,” Bhattacharya said.

Nagesh Kumar reinforced the case for a rate cut, arguing that it would stimulate demand for housing and durable goods while lowering the cost of capital for private investment.

The message from the MPC is unambiguous: monetary policy must pivot towards growth. Now, it must walk the talk.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)