Sluggish GDP growth may force RBI to revisit its rate stance, say experts

Reserve Bank of India

A sharp slump in the growth may force the Reserve Bank of India (RBI) to relook its stance on interest rates, which it has held steady since May 2020, experts have said. The RBI’s monetary policy committee (MPC) is meeting from December 4 to December 6.

Slower-than-expected growth has reduced the policy space for rates to remain on pause, they said. India’s GDP growth slumped to its lowest in seven quarters at 5.4 percent in the September quarter, data released on November 30 shows.

The economy grew at 6.7 percent in the previous quarter and 8.1 percent in the year-ago period.

“RBI has remained on pause since FY24, with a policy focus on reigning in inflation. The policy space to remain on pause was provided by strong growth conditions. However, post the Q2FY25 GDP print, policy space has reduced with a slowdown in both consumption and investment. We see a higher chance of the rate cut cycle starting from December (v/s previous expectation of February),” Gaura Sengupta, Economist at IDFC First Bank, said.

Also read: MPC poll: RBI unlikely to cut rates on December 6, may revise inflation projection upwards

In October, the MPC left the repo rate, the rate at which the RBI lends money to banks, unchanged at 6.5 percent but changed the stance to “neutral” from “withdrawal of accommodation”.

The change in stance to “neutral” suggests that the RBI can cut or increase interest rates. Typically, this position is adopted when the policy priority is equal on both fronts — inflation and growth.

The second quarter growth was sharply lower than the RBI’s projection in the October policy.

It projected real GDP growth for FY25 at 7.2 percent, with Q2 at 7 percent, Q3 at 7.4 and Q4 at 7.4  percent. Real GDP growth for FY26 Q1 is expected at 7.3 percent.

On the other hand, higher inflation may allow the RBI to wait for one more policy to cut rates because even though growth has slowed down, most experts believe it will pick up in the second half of the current fiscal.

“On balance, we expect GDP growth to pick up in H2 FY2025, on the back of government capex, agri output and rural consumption, resulting in a full-year expansion of 6.5-6.7 percent,” Aditi Nayar, Chief Economist and Head - Research & Outreach, ICRA said.

Also read: Experts trim FY25 GDP target amid slowing consumption, lower capex

Experts also said the central bank may revise its growth projections in the December policy.

“The RBI is likely to revise the annual growth forecast down to 6.5-6.7 percent and maintain a neutral hold in the December policy,” a DAM Capital’s report said.

According to a Moneycontrol poll of 15 economists, bankers and fund managers, the RBI is expected to keep the policy rate unchanged for the eleventh time later this week on higher inflation. Most of the respondents were surveyed before the release of the September quarter GDP numbers.