No room for knee-jerk reaction on growth forecast, RBI action: Guv Das

RBI Monetary Policy Committee answers queries on growth forecasts, liquidity, cash demand, and CRR adjustment

Reserve Bank of India (RBI) Governor Shaktikanta Das emphasised the importance of well-timed and evidence-backed actions during the Monetary Policy Committee (MPC) press briefing on Friday. Das outlined the challenges facing the economy, the rationale behind recent policy moves, and expectations for the months ahead, stating that there was no room for “knee-jerk reactions”.

 

“We need more credible evidence on how the outlook is likely to be, and based on that, the effort is always to take action in time. Whatever action we take has to be well-timed,” he said.  RBI has maintained the repo rate at 6.5 per cent. 

 

Second half of FY25 was better than first

The governor highlighted that the second half of the financial year looks more promising than the first, which was impacted by elections and subdued government expenditure. Factors such as continued monsoons, slow manufacturing, and challenges in mining and electricity added to the economic strain in the second quarter.

 

RBI’s GDP growth misses estimate

When asked about the RBI’s downward revision of growth estimates for the second quarter from 7 per cent to 5.4 per cent, MPC member Michael Debabrata Patra identified intertwined demand and supply issues. Weak investment due to a slump in sales growth affected demand, while inflation impact on urban consumers reduced sales, further dampening investment on the supply side.

 

Patra added, “Since sales are down, investment is down. However, the slowdown has been muted in terms of inflation.”

 

Should food components be removed from inflation?

Das also addressed the higher-than-expected inflation in September and October, attributing the spike to food prices. When asked about the potential of removing the food component from inflation measure, the governor said that this target is mandated by the RBI Act and cannot be altered.

 

Chief Economic Adviser V Anantha Nageswaran had earlier suggested excluding food from inflation calculations due to their volatile nature. Nageswaran had argued that food prices were out of the control of the Reserve Bank and were usually the primary drivers of inflation spikes.

 

“The law clearly outlines that headline inflation is the target. This is written in the law. We do not have the discretion to change this,” Das said on the matter. He added that the RBI will continue to move towards its 4 per cent target for inflation.

 

Liquidity, cash demand, and CRR adjustment

The RBI anticipates tight liquidity in the coming months due to tax-related outflows from direct and GST collections. Das also highlighted seasonal cash requirements driven by increased agricultural activity and the harvest season, which could add to circulation pressures.

 

Dollar inflows, meanwhile, remain difficult to quantify, Das said in response to a query on the matter.

 

When asked about the decrease in the Cash Reserve Ratio (CRR), the percentage of a bank’s deposits held as reserves by the RBI, Das explained that the 50-basis-point reduction to 4 per cent, announced earlier, follows the temporary 2022 increase, which has now ‘served its purpose’.