Banking Central | Will rate-setters blink in monetary policy meet next month?

Even within the MPC, the rate-cut lobby is very much active.

It could be the straight eleventh time that the rate-setters of the nation would refuse to lower the guards on the economy as inflation has begun blazing the markets yet again.

But, in the run-up to the Monetary Policy Committee meet for its bi-monthly review on December 4 to 6, there is a raging cry for growth. The question is: will the rate-setting panel eventually reduce the key policy rates to reignite the growth engine? Monetary policy makers will have to be sensitive of the growth concerns of the government and other stakeholders. Too high interest rates for too long could be damaging for the economy.

Even within the MPC, the rate-cut lobby is very much active. In the last policy review in October, Nagesh Kumar, the only MPC member who voted for lowering the rates, had argued that a rate cut could help revive demand and boost private investment. Going by the MPC minutes, he made a convincing argument for a rate cut.

In his note, Kumar listed factors that could warrant a rate cut, such as easing inflationary trends, sluggish demand and rate actions by other economies, including that by the US Federal reserve.

As the minutes show, Kumar’s point of view was that the emerging trends in the Indian economy suggest a slowdown in the economic growth from 8.2 percent in 2023-24 to 6.7 percent in the first quarter of 2024-25. Also, the projection for the full year 2024-25, according to the Survey of Professional Forecasters, has been revised down by 10 basis points to 6.9 percent.

Core sectors such as cement, iron and steel, and chemicals have been putting up a negative growth over the past two quarters despite a rather robust push for infrastructure by the government through unprecedented capital expenditure since 2023-24. This is a cause for concern, Kumar had said.

The cost of finance for private companies too has gone up steadily since March 2022 when the Reserve Bank of India began raising the policy rates, he pointed out. The recent RBI surveys too supported his argument. According to the Enterprise Surveys, the demand conditions in manufacturing and the job landscape moderated across major sectors. Also, the Consumer Confidence Surveys suggest that the general economic conditions have worsened compared to the year-ago period.

Overall business sentiment also moderated in the second quarter of the 2024-25. PMI for manufacturing eased somewhat in September, although it stayed in the expansionary zone.  All these trends point to the weaknesses in demand in the domestic economy in general, and industry in particular, Kumar argued.

Similarly, India’s merchandise exports have shrunk by 9.3 percent in August due to subdued demand abroad. The April-August growth of merchandise exports has been just a marginal 1.1 percent.

“Therefore, the Indian industry is clearly suffering from demand deficits in both domestic and external markets,” Kumar said, adding that demand deficits may be the reason private investment has not picked up momentum despite healthy balance sheets of the companies and all the reforms and incentives extended by the government.

Then there is pressure from the government. At least two top central government ministers - Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal - have openly pitched for a rate cut. There is a growing chorus among economists as well who have cited cracks in the economy that need heeling.

The MPC has hiked the interest rates by 250 bps since May 2022 to fight inflation. This has considerably impacted consumer demand as borrowings have turned costly. Recent data from earnings of consumer-focused companies suggests a clear demand slump. The question is what more the MPC can do to fight a supply-side problem fundamentally.

At a broader level, inflation has been declining, despite the recent spike in October. Food inflation, especially in cereals and vegetables, has been challenging but it is driven by cyclical supply side issues, rather than demand, which is addressed by the monetary policy.

In view of these factors, a rate cut isn't entirely off the table for the December policy meet.

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.