There is one corner of the economy the monetary policy committee (MPC), led by RBI Governor Shaktikanta Das, will look at while taking a call on interest rates a few days after India’s economic growth slowed to a shocking 5.4% in the fiscal second quarter.

Pressure on the MPC to dial interest rates down has intensified after GDP growth sank to a seven-quarter low. The argument pressed forward by some economists is that high-cost borrowing is hurting growth, private corporate investments, jobs and consumption demand. The time has come to shift to a rate-cutting cycle, much the way the US Federal Reserve and some other central banks have done.

Even before this grim GDP data came to light, two senior Union ministers expressed their desire for borrowing costs to fall. Commerce & industry Minister Piyush Goyal urged the RBI to cut rates to boost economic growth. In a separate event, Finance Minister Nirmala Sitharaman said  that people are finding current interest rates “very stressful” and urged banks to make them affordable.

The MPC, however, is most likely to keep the benchmark repo rate unchanged for the 11th time in a row and continue its support to inflation at this crucial juncture, which is sitting at a 14-month high of 6.21% in October  and requires considerable cooling. In the inflation versus growth battle post-Covid, the RBI has given more importance to taming prices due to abnormal circumstances, supply chain disruptions and geopolitical tensions. After hiking the repo rate by 250 basis points to 6.50% between May 2022 and February 2023, the MPC has left it untouched for the past 22 months. 

After the US Federal Reserve cut interest rates in mid-September for the first time in four years, some optimists felt that the RBI had policy space to start the monetary easing cycle. Just a few days before, India announced that its inflation stood at 3.65% in August. This, in fact, was for the second consecutive month that inflation slipped below the RBI’s target of 4% after a gap of nearly five years.

In the October policy, however, nothing on the repo rate front changed as the MPC feared that food prices would continue to soar. The policy, though, left an opening, with the MPC changing its stance from ‘withdrawal of accommodation’ to ‘neutral’. Das said it “provides greater flexibility and optionality to act in sync with the evolving conditions and the outlook”. That is the closest the MPC got towards a possible rate cut.

The answer to growth is not always that simple. You can’t invariably count on rate-cuts as the way to boost growth; it can’t be built on a rickety foundation. High inflation can lower consumer spending, hit sales of companies and impact growth. In case of rising food prices, the purchasing power of lower-income households will reduce. 

Das, who took up the role of RBI Governor in December 2018, considered price stability as a bedrock for sustained growth. “A stable inflation or price stability is in the best interest of people and the economy. It acts as a bedrock for sustained growth, enhances the purchasing power of people and provides a stable environment for investment,” Das said while addressing a high-level policy conference of central banks from the Global South, a few days after Goyal spoke on the need for interest rate cuts.

The shocking data on GDP growth for the fiscal second quarter hadn’t come by then.  There was a certainty in the air that the RBI wouldn’t touch repo rates until inflation came under control. Now with economic growth falling far below expectations, that dynamics has changed. The RBI’s balancing task is made all the more difficult with inflation also being in a higher zone.  

Despite deep concerns being raised over a slowing GDP, economists believe there will be no rate cut in this bi-monthly policy, which is set to be announced this Friday. 

“Given the rather uncertain global environment and the possible impact on inflation and the fact that inflation has been averaging close to 5.9% in the last two months, a status quo on repo rate will be the logical outcome from the policy,” said Madan Sabnavis, chief economist at Bank of Baroda. 

Aditi Nayar, chief economist at ICRA, also expects no rate cut in the December policy due to the recent spike in inflation, but believes that could change in the next one. “With the GDP growth print sharply undershooting the committee’s expectations, a February 2025 rate cut may be on the table if the next two inflation prints recede,” she says.

By the time the next bi-monthly monetary policy falls due, economists expect the GDP growth to bounce back and inflation to have improved. But will it be enough to induce rate cuts? Even if it is not, there will be more pressure on the RBI to support growth by lowering borrowing costs so that India continues to be the world’s fastest-growing major economy. The Narendra Modi-led NDA government is on a drive to lead India into the third-largest economy by 2030, overtaking Japan and Germany. In an event, Sitharaman recently said that lower interest rates would be crucial in achieving the country’s ‘Viksit Bharat’ (Developed India) vision.

The three-day rate-setting MPC meeting starts today amid uncertainty over the tenure of Das.  His three-year term as RBI Governor ends next week on 10 December, but there is no official word yet from the government on his extension. The first time he was given an extension in 2021, the government had announced it more than a month before his tenure was to expire. 

Last month, news agency Reuters reported that  the government is likely to extend his term for the second time, making him the longest-serving RBI Governor since Benegal Rama Rau, who filled the role for seven and a half years between 1949 and 1957. But this was before the GDP growth figure for the July-September quarter came out, which fell far below the RBI’s estimate of 7%. Speculation is now rife over the future of Das on account of this. Though his second extension is widely anticipated, there is no communication from the government on it yet.

Caught in a period of Covid lockdowns, geopolitical hostilities and great volatility where maintaining price and financial stability posed difficult trade-offs, Das took upon himself the difficult task of bringing inflation down to the preferred gauge of 4% while ensuring growth. Inflation did fall below that level on a few occasions but not on a durable basis for him to feel that his mission on the price front was accomplished. He will need another innings to do that.