The underlying slowdown in growth is due to inflation: RBI Governor Das

Its better we stick to monetary policy, says RBI governor Shaktikanta Das

Reserve Bank of India (RBI) Governor Shaktikanta Das, along with Deputy Governors Michael Patra, M Rajeshwar Rao, Swaminathan J and T Rabi Sankar, responded to a range of questions during a post-policy media interaction. Excerpts:

 

Have you heard from the government whether you will continue after the current term, at least informally? 

Das: I am not giving you any headline … it is better we stick to monetary policy.

 

How did you get the growth estimates (for Q2) so wrong? 

Michael Patra: If you look at demand, the main problem is investment. On the supply side, the main problem is manufacturing. The two are intertwined. In manufacturing, the biggest issue is the slump in sales growth and that is reflecting inflation hitting the urban consumer. So when sales growth is down, companies do not want to invest in new assets because they see demand as moderate and it can be met from existing capacity. So the underlying slowdown in growth is due to inflation.

 

Despite the reduction in the gross domestic product forecast, the rates are basically maintained. The cash reserve ratio was reduced by 50 basis points. What is the thinking behind that? 

Das: As regards growth, the second half of this year looks better than the first half. In the first quarter this year, there were issues that coincided with the elections. Probably that affected government expenditure in particular. In the second quarter, the reasons for the slowdown we have explained. Continuing monsoon rain also affected activities. Manufacturing was slow. So, I have explained why we expect the second half to be better this year. On inflation, we have given a road map. So, we need more credible evidence that things are happening the way we are expecting. When there is a time for a particular action, be it a rate cut, be it liquidity action … it has to be well timed.

 

Is the trend growth for India much lower than what we have been talking about? 

  Patra: It is not, I think, appropriate to make a judgement on the trend rate on one data point. So what was expressed as 8 per cent was not a trend. It was just the average from 2021 to 2024. 

What the governor has been saying is that the average between 2021 and 2024 was 8 per cent. Now, if you see the second half of the year’s projections, there is a reversion back towards an upper rate of growth -- 6.9, 7.3 -- and that continues into 2026. So we are hopeful that we will reach that level again. 

 

How concerning is the stress in microfinance? 

Swaminathan J: The governor has said in these segments, where enhanced slippage is being witnessed, we have requested banks and non-banking financial companies to strengthen their underwriting standards and to step up collection efforts to ensure that the stress does not translate into non-performing assets. So, on the same theme, we continue to engage with the entities wherever we see any outlier behaviour. At the system level, it is not a big concern.

 

A couple of times you have said the growth-inflation balance has got skewed and you have to restore the balance. Does it mean you were skewed in favour of growth and you are going back to inflation or was the balance skewed in favour of inflation and now it will become pro-growth? 

Das: With regard to the growth-inflation balance, I did not say “skewed”, I just said unsettled. Basically what we mean is that last time we had said that the growth inflation balance was well poised. “Well poised” means growth looked good for that quarter as well as for the whole year. Inflation was more than what we had expected. So, the well-poised character of the dynamics between growth and inflation -- that has become somewhat unsettled. Our effort is now to restore that balance, which means we want inflation to be brought down closer to the target.

 

Are there any changes in rules on stake acquisition by banks in insurance companies? 

M Rajeshwar Rao: We have put out a draft circular on forms of business, where we have written about what percentage of holding and what type of business banks can invest in. So, regulatory action will be taken on the basis of that. We are waiting for feedback.

  Das: Regarding mis-selling (in insurance), we have clear instructions to banks. There is no need to do anything new.