Recording of the Event

Key Takeways

1. Growth rate plunged to 5.4 percent in Q2 is disappointing.
2. Interest rate sensitive sectors recording a decline- capital formation, manufacturing, and construction.
3. Inflation mainly due to vegetables.
4. Slowdown in GDP expected in Q3.
5. Tight liquidity in the market needs to be addressed.
6. Foreign exchange reserves depleting.
7. Exchange rate depreciating.
8. Inflation is on the margin.
9. Increased uncertainty in the US.

Recommendations of EGROW Shadow MPC

Members of EGROW — 5
Repo Rate
Pause – 3
Decrease – 2

Guests — 4
Repo Rate
Pause – 1
Decrease – 3

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Ashima Goyal, Former Member, Monetary Policy Committee, Reserve Bank of India

The MPC is in a difficult situation where headline inflation at 6.2% came above their tolerance band in October but Q2 FY25 GDP growth has also slowed dramatically to 5.4% compared to the RBI forecast of 7%. But examining the data carefully suggests that while inflation is a temporary spike, which flexible inflation targeting gives room to look through, the components of GDP that have slowed are sensitive to real interest rates—manufacturing, construction and investment. This suggests a trend slowdown that requires immediate action to reverse, else the 2010 slowdown may repeat. Policy also has to boost domestic demand to counter slowing exports and possible global volatility. The post pandemic good performance was built on a real interest rate less than unity and countercyclical smoothing of shocks that should continue. High rates were not found to be necessary to sustain credibility of inflation targeting—they only had to respond to persistent inflation. Banks do not want a rate cut and markets do not expect it, but the financial sector will ultimately gain if the economy does well. Since guidance has not been forward-looking, but data-based, the new data point gives the MPC the freedom to cut the repo rate. They also have the space to cut and should, in my view, vote for a 25bps cut.

2. Shri Indranil Sen Gupta, Professor of Practice of Economics, Shiv Nadar University

We have been calling for RBI rate cuts for over 6 months as we believe that real rates above unity hurt growth.

That said, given its recent hawkish signals, we expect the RBI MPC to cut CRR this time and rates in February.

We fully understand that the RBI (and all other EMs) has had to raise rates to protect INR against Fed hikes. Now, that the Fed is cutting, there is surely a window to support growth in India, although core inflation may later stymie Fed easing. After all, inflation is India is benign, barring food shocks over which monetary policy has no control.

3. Statement by Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

The MPC faces a trillema and will need to delicately navigate through elevated inflation- slump in growth- adverse global conditions. The deteriorating liquidity conditions further warrant immediate attention. I expect liquidity easing measures to be announced first before a repo rate cut in order to avoid delays in transmission. The elevated credit-deposit ratio in the tightening liquidity conditions may further increase the stress on banks. Thus a CRR cut of 50 bp in phases would be of help setting the ground for Repo rate cut in February.

4. Shri Siddhartha Sanyal, Chief Economist & Head- Research, Bandhan Bank

The long term growth of reserve money is in the range of 12-15 percent per annum. In the current period, for nearly two years there is liquidity crunch in the market as the growth in reserve money is nearly half at 7 percent. The money market rates are not very volatile.

He does not expect a rate cut this time.

5. Dr. Charan Singh, CEO and Director, EGROW Foundation

The growth rate as measured by GDP has slowed down to 5.4 percent in Q2 of 2024-2025 from 8.1 percent in Q2 of the previous year, which is disappointing. This dismal growth rate is probably because of high interest rates which are impacting the manufacturing sector rather negatively. The growth rate in the manufacturing sector has collapsed to 2.2 percent in Q2 from 14.3 percent in the previous year. The Gross Fixed Capital Formation which is also interest sensitive, is significantly down from 11.6 percent in Q2 of previous year to 5.4 percent in Q2 of current year. The construction activities are also severely impacted recording a decline from 13.6 percent to 7.7 percent over the period. Production of cement has declined from 10.3 percent in Q2 of previous year to 3.0 percent in Q2 of current year, while that of steel was down from 17.7 percent in Q2 in 2023-24 to 12.0 percent in Q2 of current year. Thus, interest sensitive areas like construction and manufacturing are recording a significant decline. Interestingly, sales of commercial vehicles, capturing demand has also recorded sharp decline of 11.0 percent in Q2 of current year compared with 6.8 percent in previous Q2.

Globally, the policy interest rates are softening. In the US, Fed has reduced the interest rates twice in the last two months. Similarly, European Central Bank (ECB) and Bank of England (BOE) have opted to reduce their interest rates, and these reductions have been carried out despite inflation not yet below the 2 percentage points (which is a 30-year average for most of Advanced Economies). In fact, in India, inflation was never too high as compared with 30- year average of about 6.0 percent.

In view of the sharp decline in GDP’s growth rate, it is recommended that the RBI may consider lowering the Repo rate in December, 2024. The lowered interest rates will help to spur capital formation and revive economic growth.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

1. Shri Subhas C. Aggarwal, Chairman and Managing Director, SMC Group.

GDP of Q2 is just 5.4 percent as against targeted GDP 7.2 percent for 2024-25.

The targeted inflation for the year is 4.5 percent, while it stood at 6.21 percent in November, up from 5.5 percent in September and 3.65 percent in August. There is a global uncertain environment.

The Fed has reduced interest rates twice in 2024. It is expected that tariffs will be imposed on imports from Mexico, India, and China by Trump in January.

The Indian rupee has been strong against the dollar. Considering all these factors, there is a greater challenge for the RBI to reduce interest rates.

2. Sh. Arjun G Nagarajan, Chief Economist, Sundaram Mutual

Expect RBI rates on hold, with more verbal intervention.

• RBI has been very positive around growth for a while now, with the last policy in particular.
• The last RBI policy was very hawkish on inflation, insisting on viewing inflation holistically, rather than selectively (as core inflation).
• Therefore from the point of view of policy credibility and continuity, the RBI would probably deliver a pause in its Dec’24 policy.
• A rate cut from the RBI could be read by markets as a concern in the RBIs mind, rather than a welcome positive Gradual rate easing probably is the need of the hour given its lagged impact on growth.
• Under a Trump presidency, while crude might remain muted, tariffs and the broad level of concerns around a Chinese-response might warrant some caution, given the impact it could have on the commodity cycle.
• Therefore some softening in stance, alongside realistic growth projections for now followed by cuts in its post Union Budget policy in 2025.
• By Feb'25, the broad narrative around US tariffs and China's response would be clear and the RBI would be in a better position to act.
• Note here that the current liquidity tightness is most probably due to RBI's forex intervention to smoothen the Rupee.
• Govt. cash balances with the RBI have seen reducing and once government spending starts picking up; domestic liquidity should also witness some easing pressures.

3. Shri. Sadaf Sayeed, CEO, Muthoot Microfin Ltd.

I recommend a rate cut of 25 bps.

I represent microfinance fraternity which serves the people at absolute bottom of pyramid. Our agenda is financial inclusion, we provide credit facility to unserved and underserved. Out of the 8.5 crore household that microfinance industry serves 95% are in rural households. The rural poor are severely affected because of persistently high food inflation. The recent print of food inflation came at 10.87%, baring July and August for last 12 months food inflation has been above 8%, which is very high. This problem is further extenuated because of stagnant rural wages for a very long period of time. The real wages in last 5 years have actually contracted.

The immediate concern is that inflation will have direct and severe impact on rural poor. Inflation works very differently in this segment, unlike urban household who are forced to compromise on discretionary spending, poor household are forced to compromise on necessities due to high inflation. The persistently rising vegetable prices are having an impact on budget of poor households, since food is an unavoidable expense the rural households are forced to de-prioritize other necessary expenditure such as loan repayments. In the pecking order first comes instalment of unsecured loans , hence we are witnessing rise in delinquency in microfinance loans and other unsecured loans.

Our recommendation for 25bps rate cut is for two reasons:

• It would reduce the burden of instalment on the rural household
• It will induce necessary cash flow in the economy; it will also propel growth which will help people across segments to earn more.

4. Shri Sujit Kumar, Chief Economist, NABFID

GDP growth prints for Q2FY25 came much weaker than expectations, underlying tighter fiscal and monetary policy taking a toll, especially on interest sensitive manufacturing sector. General government capex has also declined in H1FY25, making it imperative to raise spending in H2 for meaningful growth recovery.

Inflation meanwhile rose past 6% level in October led by vegetables and unfavourable base effects. With Kharif harvest coming in markets and well replenished reservoirs, farm sector outlook is bright in H2FY25. This will help inflation revert to sub five levels in Q4FY25.

Externally, interest rate trajectory has shifted downwards with advanced economy central banks following cue of the US Federal Reserve. Tariff talks notwithstanding, the rates are likely to remain softer, going ahead as demand concerns take precedence in monetary policy.

For India, higher growth makes a better insurance against investment outflows than interest differential. By keeping real rates elevated, the monetary policy can aggravate the macro stability concerns, going forward.

Besides, a few monthly inflation readings above 6% should not concern monetary policy committee as it has a flexible mandate to accommodate growth concerns as well. The current spike is transitory.

Seen together, as inflation likely eases while growth remains below potential, the case for easing repo rates in upcoming bimonthly review is strong. I recommend a cut in repo by 25 bps with enabling liquidity conditions for better transmission. The RBI could well revise its growth and inflation projections for FY25 as well.