Highlighting the interplay between monetary policy, fiscal management, and broader economic dynamics.
Stock Market Resilience
- The Indian stock market has shown remarkable insulation from the Reserve Bank of India’s (RBI) monetary policy.
- Despite changes in the prime lending rate (PLR), the Sensex continues to grow, reflecting robust investor confidence in India’s economic potential.
Economic Growth
- India’s GDP growth consistently exceeds the “Hindu rate of growth” (around 3.5% from the 1950s to 1980s), now comfortably above 6% in normal years, and sometimes reaching 8%.
- This growth is attributed to effective management at the Finance Ministry, led by Nirmala Sitharaman, and contributions from various economic actors.
RBI Monetary Policy
- The RBI’s Monetary Policy Committee (MPC) has maintained the policy rate at 6.5% for the 11th consecutive meeting, prioritizing inflation control as consumer inflation remains above its comfort range (4% ± 2%).
- The MPC has, however, lowered the Cash Reserve Ratio (CRR) by 50 basis points to 4%, releasing ₹1.2 lakh crore into the banking system. This move aims to alleviate the impact of high PLR on lending activity.
Economic Outlook
- RBI Governor Shaktikanta Das suggested that the economic slowdown has likely bottomed out, with higher growth expected in the second half of the fiscal year.
- The current financial year is projected to achieve 6.5% GDP growth, with the last two quarters potentially nearing 7%.
Rate Cut Prospects
- The MPC might consider reducing the policy rate in its February 2025 meeting if inflation trends downward, supported by:
- A good Kharif harvest and expectations of a strong Rabi sowing season.
- Seasonal easing of vegetable and fruit prices with the onset of winter.
Context and Challenges
- Despite pressure from the government for a small rate cut, the RBI has adhered to its primary mandate of controlling inflation.
- The global economic scenario, including external factors like the “Trump factor,” may play a role in shaping future monetary policy.
- Shaktikanta Das’s tenure as RBI Governor, set to end soon, could see an extension, impacting continuity in policy leadership.
Key Implications
- A February rate cut could provide relief to borrowers, stimulate growth, and boost market sentiment.
- Effective policy coordination between the RBI and the Finance Ministry remains crucial for sustaining growth and managing inflation.
In conclusion, India’s economic fundamentals appear robust, with cautious optimism around growth and inflation trends, alongside hopes for a potential rate cut early next year.
