The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) started its three-day meeting on Wednesday, December 4, to decide on interest rates and its policy stance against the background of sluggish GDP and sticky inflation. On Friday, December 6, RBI Governor Shaktikanta Das will make the announcement regarding the MPC's policy decision.
India's Consumer Price Index (CPI)-based inflation for October was 6.21%, which was higher above the RBI's tolerance range of 4-6 percent and was a 14-month high. On December 12, the CPI statistics for November will be made public.
Significantly, experts say the RBI cannot overlook the dollar's surge in value following Donald Trump's presidential victory in the United States at this pivotal moment. The rupee has hit a record low against the dollar as a result of persistent concerns about shocks linked to climate change and ongoing geopolitical conflicts.
Even though the RBI's growth and inflation forecast will likely see significant downward or upward revisions, Madhavi Arora, Lead Economist at Emkay Global Financial Services, emphasized that the MPC may find it difficult to defend an immediate rate cut given their focus on durable disinflation.
However, the central bank will face pressure to lower rates in a traditional manner when economic growth slows.
Arora thinks that in the face of shifting global dynamics, the window and timing of rate decreases are narrow and difficult. The RBI might also choose to consider the foreign exchange costs associated with rate reductions.
"With a CRR return to the pre-Covid 4% level, unconventional policy instruments like liquidity easing could serve as a useful balancing act. This would entail an input of ₹1.2 lakh crore at a time when core liquidity may gradually swing to a deficit due to unsterilized foreign intervention and CIC leakages. We anticipate loosening lending regulations in the future to boost the declining credit offtake," Arora stated.
