India’s unexpected economic slowdown in the July-September quarter has intensified the spotlight on Reserve Bank of India (RBI) Governor Shaktikanta Das, whose term is set to expire next week. The country’s GDP grew by just 5.4% during this period, marking its lowest pace in seven quarters and falling significantly short of the RBI’s earlier forecast of 7%. This growth miss has raised questions about the effectiveness of the central bank’s current policies and added pressure on Das, as economists and market watchers speculate on his future and the need for potential policy adjustments.
Though Das has long been expected to continue in his role, Prime Minister Narendra Modi’s government has yet to offer any clarity on whether he will be reappointed. At the same time, calls for an interest rate cut are growing louder, as inflation remains above target and economic growth falters.
Most economists predict that the RBI will hold its key repo rate at 6.5% when it meets on Friday, the same level it has maintained for nearly two years. India’s inflation surged to 6.21% in October, driven largely by soaring food prices. This marked a 14-month high and was well above the government’s tolerance band of 4%, plus or minus two percentage points.
Economic Miss a ‘Wake-Up Call’ for the RBI
Radhika Piplani, economist at DAM Capital Advisors Ltd., called the economic slowdown a “wake-up call” for the RBI. She suggested that the central bank’s next rate decision could be pivotal, particularly in light of the GDP miss. “If the RBI does not ease now, it could be forced to implement a larger-than-expected cut in February,” she warned.
This underperformance of the economy has spurred debates about whether the RBI is doing enough to support India’s rapid growth, which has been a focal point for global investors. While core inflation—excluding volatile food and energy prices—remains moderate, calls from government officials for reduced borrowing costs have intensified. Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal have both expressed support for lower interest rates in recent months. Some economists argue that the RBI could be doing more to stimulate growth by encouraging lending.
The slowdown is also causing concern among international investors, who have been attracted to India by the country’s potential for rapid growth. Despite a recent uptick in foreign equity inflows, the ongoing weakness of the rupee—coupled with the broader global economic challenges—has reduced some of India’s luster as a favored investment destination.
RBI Faces Dilemma Amidst Slower Growth
Despite the grim GDP numbers, Das ruled out an immediate rate cut last month, even as the RBI shifted to a neutral policy stance. He cited risks to inflation from rising global commodity prices and geopolitical uncertainties. He also pointed to India’s relatively stronger performance compared to other global economies. However, the latest GDP data has led economists to revise down their growth projections for the fiscal year ending March 2025. Goldman Sachs, for instance, has reduced its forecast to 6% from 6.4%, now below the RBI’s own projection of 7%.
The downgrade in growth expectations has further complicated the RBI’s position. “India is indeed slowing down and the RBI is in a quandary,” noted Suresh Ganapathy, head of financial services research at Macquarie Capital Securities. He expects mounting pressure on the RBI to implement a rate cut by February 2025.
Calls for Action Sooner Than February
Some economists believe that waiting until February may be too long. Gaura Sen Gupta of IDFC First Bank suggested that the RBI should consider cutting rates sooner, given the typical delays in the transmission of policy changes. “The RBI should not wait for February to cut rates,” she said. “The transmission lag could delay the effect of any policy action.”
Meanwhile, Kaushik Das of Deutsche Bank speculated that the RBI might first opt to reduce the cash reserve ratio (CRR) to ease liquidity before implementing a repo rate cut. This would help ensure that any eventual rate cuts would have a swift impact on the economy.
As the RBI faces pressure to act, the coming months will likely be critical in determining the future direction of India’s monetary policy and its economic trajectory.
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