January 22, 2025

RBI Should Bat For Growth Now

By Linus Garg
First publised on 2022-12-14 09:17:06

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Linus tackles things head-on. He takes sides in his analysis and it fits excellently with our editorial policy. No 'maybe's' and 'allegedly' for him, only things in black and white.

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For the first time this year, retail inflation had slipped to 5.9%, just below the upper limit of the tolerance band set by the RBI. With winter setting in and supplies improving, the sharp fall in prices of vegetables has eased the pressure on the food price index which has gone down to 4.7% in November from 7% in October. But core inflation is still at 6% and is showing no signs of easing. Other economic indicators are also not comforting. Sales of consumer durables are not looking up for the last four months and contracted by a huge 13.4% in November. Manufacturing remains a cause for concern and shrank by 5.6% in October. With the global slowdown now clear, exports are also showing a decline with new orders hard to come by. Domestic demand remains subdued and is unlikely to perk up in the near future.

Considering all this, the MPC of the RBI must now seriously bat for growth and maintain status quo on key policy rates. It has already hiked interest rates by 2.25 percentage points in just over half a year and with inflation showing signs of easing; it is already ahead of the curve. The effect of cumulative interest rate hikes will be will come into play more forcefully in the next quarter. It will lead to further slowdown in growth. With the US Fed already indicating that it will not go in for successive and high hikes despite strong inflation in the US, the RBI should also tone down its aggressive stance.  It should now wait for fiscal policy to tackle inflation further (since it is mainly fuelled by supply side factors) and then take a considered decision on policy rates. For, since inflation is now under control, the focus should once again be on growth.