The Reserve Bank of India (RBI) has opted to hold the benchmark repo rate at 5.5% because the economy is changing and there are still global concerns. Sanjay Malhotra, the governor of the Reserve Bank of India (RBI), said in the minutes of the Monetary Policy Committee (MPC) meeting issued on Wednesday that there is room in the policy for a rate cut, but now is not the ideal moment to do it because it might not help the economy as much as hoped.
The central bank changed its forecast for the consumer price index (CPI) inflation rate downward and its forecast for GDP growth upward at the MPC meeting earlier this month. This shows that the bank is hopeful about India’s economy’s ability to bounce back.
Malhotra: “Not the Right Time” to Lower Rates
Malhotra explained his position by saying that the government and the RBI have already put in place various fiscal and monetary policies that will help the economy thrive, and the full effects of these measures have not yet been seen.
Malhotra added, “There is room in the policy to lower the policy rate even more, but now is not the right time because it won’t have the desired effect.”
He said that even if India’s economy is still growing, tariff-related uncertainties and high global risks are still problems. But he also said that the growth prognosis is still less than he would like it to be, which means that the economy is still facing problems.
He said that the good prognosis for headline and core inflation, along with the lower expectations, has made it possible for future policy support. Still, he said that the current posture should stay neutral so that it doesn’t send the wrong signals about potential policy changes too soon.
He said, “If we changed our position now, it would mean giving a clear forward guide about the direction of the policy rate.” “The uncertainty about policy, the quickly changing events, and the unclear future all point to the need for caution. We should look at each policy based on the current macroeconomic conditions.”
Poonam Gupta, the Deputy Governor, says that cutting rates now might be too soon.
Poonam Gupta, the Deputy Governor, also agreed that rates shouldn’t be cut yet, even though there is some room for policy changes. She said that recent government actions have made people feel better about spending money, but the consequences are still being felt.
She remarked, “It would be wise to wait until the effects of these measures are fully understood before taking another supportive step right away.”
Gupta went on to say that the rate cuts that the RBI made earlier this year are still being passed on via the financial sector. She said that making another cut now could not have much of an effect.
“Even though growth is expected to slow in the second half of the year and inflation is still low, things are changing very quickly around the world.” She went on to say, “That’s why it’s hard to vote for a rate cut right now.”
Ram Singh, an outside member, warns about the “risk of an overdose.”
Ram Singh, an external member of the MPC, said the same thing, warning that another rate drop right now could lead to a “overdose” of monetary easing.
“There is plenty of room for another rate cut.” “Is there a need for one during this policy cycle?” he asked.
He said that the effects of the 100 basis point reduction from earlier this year and the fiscal stimulus measures are still being felt in the economy. He suggested that people should be patient and wait for better results.
He said, “When the effects of the earlier repo rate cuts on demand are still being felt, another rate cut today could be too much.”
Singh says that the RBI should use the remaining policy space wisely to keep the economy growing over the long term instead of using it all up too soon.
Outlook: The RBI is taking a “wait and see” approach.
The MPC minutes show that the RBI is taking a careful, data-driven approach because the global economy is unstable and there is a lot of uncertainty about politics.
Policymakers are likely to wait for the full effects of previous rate reduction and government actions before taking any more steps, even though the lower inflation estimates provide them some leeway.
Experts say that the RBI’s neutral position shows that it is committed to balancing growth support and inflation control. Any future rate decreases are expected to be slow and based on economic data.