The December meeting of the Reserve Bank of India’s (RBI’s) six-member Monetary Policy Committee (MPC) will start on Wednesday even as there is no clarity on whether Governor Shaktikanta Das, the chair of the panel, will continue in office after his term ends next week.
The outcome of the meeting will be announced on Friday by Das at 10 in the morning.
Das was in the Indian Administrative Service. His appointment a governor was announced the day after Urjit Patel had resigned in December 2018.
He got an extension in 2021 and completes his current term next week.
The MPC meeting is important because it decides the course of interest rates. Each member of the MPC has one vote on the policy repo rate and the stance of the policy.
If the votes are equal, the governor has a second or casting vote.
After raising the policy repo rate by 250 basis points between May 2022 and February 2023, the panel maintained the status quo on the rate.
The stance of the policy was changed to “neutral” in the October policy from “withdrawal of accommodation”.
External member Nagesh Kumar voted to reduce the policy repo rate by 25 basis points in October.
Of the six members, three external members were relatively new when they first met in the previous policy review in October.
External members have a fixed four-year term.
Among three internal members, the government has initiated the process for finding a successor to Deputy Governor Michael Patra, whose term ends in January.
The December meeting is significant against the backdrop of slowest growth in gross domestic product (GDP) in seven quarters -- 5.4 per cent in July-September, much lower than the central bank’s projection of 7 per cent.
“Slower than expected GDP growth in the September quarter will increase pressure on the RBI to lower policy rate sooner rather than later, considering the bulk of the surge in headline inflation over the past two months (5.5 per cent/6.2 per cent year-on-year in September/October) was largely led by cyclical factors, especially vegetables including tomatoes, onion, potatoes and gold,” said Tanvee Gupta Jain, UBS chief India economist.
Despite the sharp fall in the growth numbers, nine out of 10 respondents in a Business Standard poll of economists said the RBI would keep interest rates unchanged in December, and that a rate cut could happen in February if the headline inflation rate fell.
Most respondents expect lower GDP growth than the RBI projection and also an upward revision in the FY25 inflation target of 4.5 per cent.
"We anticipate the status quo from the MPC in its December meeting, in spite of the GDP growth print for Q2 FY25 sharply undershooting the committee’s expectations,” said Aditi Nayar, chief economist, Icra.
“At the same time we anticipate that the MPC will moderate its growth forecast for FY25 next week.
"A February 2025 rate cut may be forthcoming if the next two inflation prints recede,” Nayar added.
The recent commentary from North Block also indicates New Delhi wants interest rates to be lowered.
“…when you look at India’s growth requirements, you can have so many different voices coming out and saying, the cost of borrowing is really very stressful.
"At a time when we want industries to ramp up and move building capacities… bank interest rates will have to be far more affordable,” Union Finance Minister Nirmala Sitharaman said at State Bank of India’s (SBI’s) annual business and economic conclave last month.
Das has been refusing to drop the guard on price rise and emphasised the headline retail inflation rate hitting the target of 4 per cent durably before any interest cut can be considered.
“… in the long run, price stability supports sustained high growth.
"Price stability is important also because high inflation is disproportionately burdensome on the poor,” Das said in a speech last month.
Elevated interest rates have started affecting growth in bank credit, which has fallen to around 11 per cent now as compared to 16 per cent at the beginning of the financial year.
Suresh Ganapathy, managing director, head of financial services research, Macquarie Capital, said in a note: “Everything is slowing … Earlier only unsecured loans were slowing … Now slowdown is spreading even to secured segments.
"Mortgage growth is down from 18 per cent to 12 per cent, auto loans -- which includes all kinds of vehicle loans -- down from 20 per cent last year to 11 per cent.”
“We believe credit growth drives GDP and not the other way round,” Ganapathy added.
The exchange rate has turned out to be another challenge for the central bank after Donald Trump was voted to be the next President of the United States.
The rupee, which was largely stable in the last year and a half, came under pressure since the first interest rate cut by the US Federal Reserve in September and after Trump’s win.
The domestic currency depreciated 0.48 per cent against the dollar in November after falling 0.25 per cent in October.
Das won several accolades as he steered the country’s financial system through various uncertain and challenging times in the last six years like the Covid-19 pandemic and war in Europe.
The present uncertainty, however, is a call that South Block has to take. (South Block because ACC is headed by PM}
