Bhubaneswar: The country’s Central Bank has signalled a CUT to see the economic growth in ACTION.
On Feb 7 MPC meeting, keeping its monetary policy neutral, the RBI has effected a cut in the Repurchase Transaction (Repo) rates by 25 Basis points to 6.25% from 6.5%.
The RBI, which has arbitrarily cut the Repo rate to as low as 4% during the Covid-19 times, had started upping it from May 2022 onwards. Repo rate was hiked to 6.5% in Feb 2023, as the country had been battling with high inflation then.
The Central Bank kept the Repo rate unchanged for the whole of 2024. RBI didn’t change the rate as the country was grappling with rising inflation in the year.
However, the tightening of the Repo rate had adversely affected the GDP growth, RBI admitted.
“The MPC (Monetary Policy Committee) also noted that though growth is expected to recover from the low of Q2 of 2024-25, it is much below that of last year.”
WHY RBI SAID THERE ARE NO FREE LUNCHES?
The RBI MPC conceded that high Repo rate for inflation targeting has come with a cost to the economy.
“The interest of the economy demands financial stability and consumer protection. Our mandate is to enhance both of them. At the same time, economic interest also warrants increasing efficiency, which too is our duty. We recognise that just like there are no free lunches, regulation to enhance stability and consumer protection too is not devoid of costs.”
The MPC then noted that there are trade-offs between stability and efficiency.
“We will keep this trade-off in mind while formulating regulations. It will be our attempt to strike the right balance, keeping in view the benefits and costs of each and every regulation,” it added.
RBI SEES MANUFACTURING GROWTH BACK IN H2 2025
Explaining the need for Repo rate cut, the RBI Governor Sanjay Malhotra has pointed out the following after sighting the growth green shoots in the economy, and the spectre of high inflation rewinding.
- Economic activity is expected to improve in the coming year.
- Agricultural activity remains upbeat on the back of healthy reservoir levels and bright rabi prospects.
- Manufacturing activity is expected to recover gradually in the second half of this year and beyond.
- Early corporate results for Q3 indicate a mild recovery in the manufacturing sector.
- Mining and electricity are rebounding from monsoon related disruptions in Q2.
- Business expectations remain upbeat, as evidenced from the PMI manufacturing future output index.
- Services sector activity continues to be resilient.
- But PMI services, however, declined from its recent peak
PRIVATE CONSUMPTION TO REMAIN HIGH
While seeing green shoots on uptrend in economic growth in the country, the RBI predicts a robust consumption in FY 25-26 for the following reasons.
- Rural demand continues to be on an uptrend
- Urban consumption which 0remains subdued with high frequency indicators providing mixed signals.
- RBI predicts improving employment conditions
- RBI lauds tax relief in the Union Budget
- It said this together with moderating inflation and along with healthy agricultural activity bode well for household consumption.
- Government consumption expenditure is expected to remain modest.
The RBI Governor in his MPC statement underlined the following for predicting a growth in fixed investment, which will trigger economic growth.
- Higher capacity utilisation levels
- Robust business expectations
- Government policy support augur
- Continued buoyancy in services exports will also support growth
Though the Central Bank seems to have a positive outlook, it cautions the Global headwinds, which continue to impart uncertainty to the outlook and pose downward risks.
RBI PREDICTS 6.7% GDP GROWTH IN FY 26
The Governor says: “Taking all these factors into consideration, real GDP growth for the next year is projected at 6.7 per cent with Q1 at 6.7 per cent; Q2 at 7.0 per cent; Q3 at 6.5 per cent; and Q4 at 6.5 per cent.”
WHY HIGH INFLATION UNLIKEY THIS SUMMER MONSOON?
The RBI reasons the following
- No Supply side shocks visible
- Good Kharif Production
- Winter freeze on vegetable prices
- Rabi crop outlook strong
HOW REPO CUT TONIC TO GDP?
As Repo rate cut is Central Bank’s liquidity adjustment tool, a cut by 25 basis points will flush the scheduled commercial banks liquidity position.
- Now, banks will borrow money from RBI to meet their short term needs at a lower interest rate. As they pass on the higher interest rate to borrowers via upping the lending rates, the rate cut will bring down the Prime Lending Rates (PLR) of the banks across the sector.
- At the same time they will lower down their interest rates for deposit, which is in a way discourage private saving. This will encourage more private consumption, when the inflation is on downslide.
- The enhanced Pvt Consumption will boost the demand.
- Whereas, the cut in PLR will bring down the cost of borrowing.
- Which in turn will give a boost to the Private investment cycle.
- Overall, a rise in PVT CONSUMPTION + PVT INVESTMENT will serve as a TONIC for GDP.
