RBI Shifts Focus Towards Growth, Takes Intentional Gamble on Economic Expansion
The Reserve Bank of India (RBI) has made a significant move by slashing the repo rate by 25 basis points to 6.25%, marking the first rate cut by the Monetary Policy Committee after five years, in May 2020. This decision comes as the RBI embarks on a journey of calculated risk in its pursuit to boost economic growth.
According to the Economic Survey, an eight per cent economic growth is considered crucial if India wants to emerge as a developed economy by 2047. The new RBI Governor, Sanjay Malhotra, shares this view and believes that India can achieve an over seven per cent growth rate.
The rate cut is aimed at bringing down borrowing rates and lowering people's equated monthly instalments (EMIs) on home loans and personal loans. This move is expected to stimulate economic activity and aid in the recovery from the impacts of the pandemic.
However, the RBI does not seem to be overly concerned about inflation and the rupee. It has reiterated that India will not aggressively defend the local currency against the US dollar. Instead, the RBI is not targeting any "specific level or band" of the rupee. This approach is in line with the RBI's forecast for retail inflation, which is conditional on the absence of any supply-side shock and major geopolitical turmoil.
The RBI's foreign exchange reserves can cover India's imports for 10 months, providing a buffer against external shocks. In the recent past, the RBI spent over $80 billion in the 10-month period between January 2024 and October 2024 to keep the rupee below 85 level against the US dollar.
The rate cut is also in alignment with the government's decision to put more money in people's hands by realigning income tax slabs in the Union Budget. This coordinated action is expected to further stimulate consumer spending and drive economic growth.
However, a higher inflation could be a red flag for foreign investors as it would not protect their investment returns from the country. To avoid a repeat of the UPA-2 era, when inflation averaged 9.5% between 2009 and 2014, the central government and state governments must play their role in keeping supply side shocks to price in control.
It is worth noting that the person who served as Governor of the Reserve Bank of India between January 2024 and October 2024 was Shaktikanta Das. Under his tenure, the RBI spent significantly to keep the rupee stable, indicating a proactive approach to maintain economic stability.
Looking ahead, the RBI expects the economy to grow at 6.7% in fiscal 2025-26, as opposed to the 6.4% estimated for the current fiscal. The RBI also expects retail inflation to slightly moderate to 4.2% in the next financial year, beginning April.
With the RBI's rate cut and the government's fiscal measures, India is making strides towards achieving its ambitious growth targets. The focus now shifts to maintaining a balance between economic growth and price stability to ensure sustainable and inclusive development.
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