‘We find ourselves in a slow growth, high inflation scenario’

Two external members of the Monetary Policy Committee (MPC) Nagesh Kumar and Ram Singh, who had voted for a 25 basis point rate cut in the last rate fixing panel meeting held between December 4 and 6, and batted for revival of growth, were hopeful that inflation would reduce in the last quarter of FY25, the minutes of the MPC meeting released by the Reserve Bank of India (RBI) on Friday showed.

“We find ourselves in a slow growth, high inflation scenario. However, inflation is largely on account of food prices, which have a rather high weight in the CPI,” Dr. Kumar said in his statement.

He said during the last 10 years, changes in repo rates seemed to have made little difference to vegetable price volatility. “Specifically, the elevated interest rates during the last ten quarters had no significant effect on price volatility, especially of TOP (tomato, onion and potato) vegetables, the primary source of volatility in headline inflation,” he highlighted to drive home the point that interest rate must be cut for revival of growth.

Stating that several indicators point to a slowing economy, he said rate cut would reduce the costs of doing business and increase the opportunity cost of holding on to cash for firms and companies.

“Hopefully, this will boost companies’ investment plans and improve the scope of employment-linked incentive schemes helping induce a virtual cycle of wage growth and demand. By tightening the labour market, it will also improve efficacy of the MP,” he stated.

“Keeping in mind the easing of vegetables and edible oil in November, food inflation should be easing further in the coming months. Core inflation persistence has declined over time, suggesting an improving anchoring of inflationary expectations,” he emphasised while advocating for a rate cut to provide impetus to growth.

“The policy responses to address the challenges of high inflation and growth slowdown should look into their determinants. Monetary policy, being a demand management tool, has limitations in addressing inflation largely driven by a supply-side shock driving up vegetable prices. The high vegetable prices represent an essentially seasonal supply-demand mismatch that has started to correct itself in November 2024,” he stated. “Though elevated, the inflation trajectory remains along the projected/expected lines. As we advance, food inflation is likely to soften in Q4:2024-25, and energy prices are also expected to be stable in the near future,” Prof. Singh said in his statement.

“A growth-supportive monetary policy is also consistent with the international scenario,” he added. However, RBI Deputy Michael Patra was of the view that durable reduction in inflationary pressures could rekindle the impulses of growth in a sustained manner.

“The expected winter easing of food prices may provide the turning point. With the prospects for private consumption expected to improve over the rest of the year, the key is to get investment going, since exports are hostage to a difficult external environment,” Dr. Patra stated.

Stressing that private investment would like to see a robust revival of domestic demand to draw in the slack that it is now experiencing, he said that “the monetary policy stance is open to support growth, but it must await the ebbing of inflation on a durable basis or else the uneven progress made so far in disinflation will get dissipated.”

Former RBI Governor Shaktikanta Das had emphasised that policy priority at this critical juncture had to be on restoring the inflation-growth balance.

“The fundamental requirement now is to bring down inflation and align it with the target. Lower inflation will enhance disposable income with households and increase their purchasing power. Such an approach would support consumption and investment demand. Without addressing this core issue, it would not be possible to foster sustainable growth,” he added.