As the Reserve Bank of India’s Monetary Policy Committee (MPC) is meeting now, it faces a complex economic backdrop both domestically and internationally. The decisions made in this meeting will be crucial, with global central banks adopting varied stances on interest rates. The Bank of England and the European Central Bank have recently reduced their rates, while the Federal Reserve has maintained its rates but hinted at potential cuts. Conversely, the Bank of Japan has raised its rates after 17 years, to address a weakening yen and rising inflation.
Domestically, India’s economy has been performing well, with rising tax collections, increasing capital expenditure, and inflation remaining within target ranges despite some volatility in vegetable prices. The exchange rate is stable, and foreign exchange reserves are at a record high. The Economic Survey highlights sustained growth in key sectors and a balanced current account, supported by strong invisible earnings.
Given this context, the MPC's decision on the repo rate will be closely watched. Many expect a status quo, reflecting a cautious approach in light of varied global economic signals. The recent actions by the BoE and ECB makes one wonder if India could decouple its monetary policy from the US Fed, particularly as the Fed is unlikely to reduce rates before the U.S. elections in November. However, concerns over a global economic slowdown, especially with its own market volatility witnessed past few weeks might prompt the Fed to cut rates in September, adding complexity to the RBI’s decision-making.
A key question is whether a proactive rate cut by the RBI, if at all, could stimulate investment and growth, encouraging the private sector to increase capital expenditure. With the Indian economy performing well and considering the actions of other major central banks, is a 25 basis point cut in the repo rate possible ? Theoretically, this could boost investment and consumption, supporting India’s growth without significantly jeopardising inflation targets.
Unemployment and job creation are critical concerns influencing the MPC's decision-making process. According to a Reserve Bank of India (RBI) report, the unemployment rate in India was 3.2% in FY 2022-23, but the Centre for Monitoring Indian Economy (CMIE), a private body, pegs it at 7.6%. This discrepancy highlights structural issues in data around jobs. Anecdotally, there are more conversations, open and not just in private surroundings, about how unemployment seems to be on the increase.
Urban unemployment remains a persistent challenge, with sectors like manufacturing and services not creating enough jobs to match the growing workforce. This sluggish job growth impacts consumer confidence and spending, which are crucial for sustained economic growth. Given these dynamics, the MPC must consider the implications of its rate decisions on employment. A rate cut could potentially spur investment in labour-intensive sectors, thereby boosting job creation and addressing unemployment concerns. Balancing inflation control with the need to stimulate job growth will be a key factor in the MPC's deliberations.
Since February of last year, the RBI had raised the repo rate to 6.5 per cent and kept it unchanged in subsequent meetings. The central bank has increased the benchmark rate by 250 basis points since May 2022. Despite this, India's economic indicators remain positive. The medium-term target for consumer price index (CPI) inflation is 4%, but food inflation in June stood at 9.4 per cent, a six-month high, while headline retail inflation reached a four-month high of 5.08 per cent. The MPC will be cautious about lowering its guard on inflation, especially with these recent figures.
Despite India’s growth rate of 7 per cent compared to global economic growth levels, there is potential for higher growth in the range of 9-10 per cent, particularly given the country’s young demographic, and the urgency towards a developed nation impetus. However, high interest rates could stifle this potential by deterring private investment and major household expenditures. In light of these considerations, the RBI’s MPC is likely to err on the side of caution. The RBI’s MPC is well-positioned to navigate these complexities with careful consideration.
Since half of the MPC members retire after this meeting, a couple after the next. The markets would look for a proactive announcement of the incoming members, much before their term starts. That could be signalling of intent to push forward the MPC agenda to steer the policy pragmatically.
