The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has decided to keep the repo rate steady at 6.5% for the 11th consecutive meeting. The decision, made with a 4:2 majority on Friday, reflects ongoing concerns over inflation and uncertainties surrounding economic growth.

The central bank retained its ‘neutral’ stance, a shift it adopted in October after moving away from its earlier ‘withdrawal of accommodation’ position.

RBI Governor Shaktikanta Das, while announcing the outcome, said that persistently high food inflation remains a significant concern. However, he expressed optimism about India’s growth prospects, citing favorable monsoon conditions and expectations of increased capital expenditure. “The MPC noted a recent slowdown in growth momentum, prompting a downward revision in growth forecasts for the current year,” said Das.

Inflation vs. Growth: The Balancing Act

The decision to hold the repo rate comes amidst pressure from both policymakers and economists to lower borrowing costs. Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal have raised concerns over high borrowing costs, while some experts have urged the RBI to take measures to stimulate lending and economic activity. Despite this, Das ruled out any immediate rate cuts, emphasizing that inflation remains above the RBI’s target of 4%.

India’s economic growth has shown signs of slowing. Recent data revealed that second-quarter GDP growth fell to 5.4%, well below expectations. Analysts now anticipate the RBI will lower its GDP growth forecast for the year, currently at 7.2%. Some institutions, like Goldman Sachs, have already revised their projections to 6%, down from 6.4%. Meanwhile, inflation continues to pose challenges, with October’s headline inflation rising to 6.2%, driven by volatile food prices.

Economist Radhika Rao highlighted the central bank’s dilemma. “This growth-inflation divergence will put the RBI MPC in a bind,” she said, predicting that the central bank may lower its full-year growth estimate by 30-40 basis points and increase its inflation outlook beyond the current 4.5% projection.

The October MPC meeting saw external member Nagesh Kumar advocate for a rate cut, and growing calls for easing rates are expected to gain more support. Economists predict that at least two members might vote for a rate reduction in upcoming meetings to bolster growth.

Liquidity Concerns and Future Measures

The RBI is also grappling with challenges posed by rising capital outflows and pressure on the rupee. Lowering interest rates could exacerbate these issues by narrowing the rate differential between India and the US. Furthermore, tight liquidity conditions, driven by the RBI’s forex market interventions and reduced banking system surplus, add to the complexities.

To address liquidity pressures, experts suggest the RBI might consider reducing the Cash Reserve Ratio (CRR), which would allow banks to lend more. Such a move could indicate a shift toward a more accommodative monetary policy.

Spotlight on Governor Das’ Future

This meeting is particularly significant as it marks the final policy review under Governor Das before his tenure ends on December 10, 2024. Speculation is rife about whether he will be granted an extension. In 2021, the government announced his reappointment well in advance, but this time, no clarity has been provided yet, fueling uncertainty.

As the RBI navigates a critical phase balancing growth and inflation, the spotlight remains firmly on the central bank’s future policy direction and leadership.