RBI MPC Meeting: What does India’s Q2 GDP print mean for the monetary policy? Experts weigh in

RBI MPC Meeting: Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil the fifth monetary policy of the current financial year 2024-25 (FY25) on Friday, December 6, after a three-day meeting which began today, December 4, 2024. The RBI’s rate-setting panel will observe the impact of global headwinds and economic determinants, such as the recent slowdown in India’s gross domestic product (GDP) and the rise in food inflation.

The review by the six-member Monetary Policy Committee (MPC) led by Das seeks to strike a fine balance between sustaining growth and keeping inflation under the four per cent target. In its last policy meeting, the MPC kept the benchmark repo rate unchanged at 6.5 per cent for the tenth straight meeting. However, the MPC changed the monetary policy stance to ‘neutral’ from ‘withdrawal of accommodation’ in the October meeting.

Also Read: Decoding India’s food inflation | Vegetable prices sizzle to 57-month high; Any respite in near-term? Experts weigh in

India’s GDP growth in the July-September quarter of the current fiscal (Q2FY25) was below D-Street estimates, and the slowdown was broad-based. Economists say even as H2 growth picks up to around 6.5 per cent, growth is expected to be below potential in the near term and requires a policy push. According to ICICI Bank research, the MPC would have to revise its FY25 growth forecast lower from 7.2 per cent year-on-year (YoY).
 

What India’s Q2 GDP print means for RBI MPC

India’s Q2FY25 GDP growth surprised negatively at 5.4% YoY (below estimate of 6.6%). The deceleration in growth is led by moderation in investment spending at 5.4% YoY compared with 7.5% YoY in Q1. Lower investment spending when Centre’s capex has seen a pick-up in Q2 shows private investment growth has been relatively lower than Q1. 

Private consumption too has dropped to 6% YoY from 7.4% YoY in Q1. Rural demand is supporting consumption when urban demand is relatively muted. Government consumption spending has seen an increase to 4.4% YoY from -0.2% YoY in Q1 with government spending picking up post elections. While exports have too moderated to 2.8% YoY in Q2 from 8.7% YoY, even imports have been weaker at -2.9% YoY compared with 4.4% YoY increase seen in Q1.

Internals of GDP point to lower growth but discrepancy too has a role to play in the numbers (–ve INR 688bn in Q2 versus +INR 189bn last year). Nominal GDP growth moderated to 8% YoY in Q2 from 9.7% YoY in Q1

Given the revised trajectory of food inflation seen by us, we now expect Q3 headline inflation at 5.5% (5.1% earlier) and Q4 at 4.1% (4% earlier). FY26 headline inflation remains unchanged at 4.3% (RBI: 4.1%). The MPC is also expected to revise its near term and FY25 projections higher. 

The US election outcome would imply an upside risk to domestic inflation in terms of an increase in imported inflation due to INR depreciation, which will increase the cost for imports, as India imports around one-third of its CPI basket. However, decline in global commodity prices should offset the same

H2 growth to be higher than H1: 

October has started on a positive note for the economy with a number of high frequency indicators (HFIs) reporting an uptick. For instance, diesel sales have seen a pick-up in October along with higher vehicle sales in festive season. India’s goods exports too accelerated to a 5-month high of USD 39.2bn in Oct, rising by a solid 17% YoY. Notably, this is the highest growth seen in last 28 months

What should the MPC do now? 

Given Q2 growth is sharply lower than RBI and consensus estimates, MPC would have to revise its FY25 growth trajectory lower from 7.2% YoY. Notably, growth in H1 is only 6% now. Even as RBI had started to revise Q2 growth lower in its bulletin, its estimate of Q3 growth stood at 7.6% YoY against 7.4% YoY in October policy. 

High frequency indicators for October show growth would revive but unlikely to see a 7%+ handle given urban consumption is still weak. Thus we expect a sharp downward revision in growth estimate even as MPC would have to revise Q3 inflation higher from 4.8% to 5.5% and retain Q4 inflation around 4.2%. Thus even as it lowers FY25 growth sharply lower from 7.2% YoY (ICICI: 6.3% YoY), it would have to revise FY25 inflation estimate higher from 4.5%

Mandar Pitale, Head Treasury, SBM Bank India

At the backdrop of shallow systemic liquidity, a significant drop in growth (GDP), lower government cash balances, RBI interventions in terms of offloading dollars in the market to maintain orderly conditions in USD INR movement; MPC, during its December meeting, may consider to infuse durable liquidity by phased reduction in CRR (25 basis points in 2 phases till the next FEB MPC meeting) to support growth through liquidity injection rather than considering a rate cut. MPC may also consider an option of infusing durable liquidity through OMO purchase.