RBI MPC 2024: “ From Elephant to Horse to……” How Will Shaktikanta Das Balance Growth and Inflation?

RBI Governor Shaktikanta Das will address the media on December 6, during the last monetary policy meeting of the calendar year 2024. This meeting is being closely watched, given the current economic backdrop. Recent growth numbers for the second quarter have not only surprised economy watchers but have also raised concerns about the feasibility of achieving the projected 7.2 per cent growth in FY25. This is happening at a time when almost all central banks worldwide have already implemented rate cuts to revive growth. 

The context is clear, but the key question now is whether a rate cut will be announced. The answer, according to most experts, is unequivocally no.

“The RBI is expected to keep its repo rate steady in December 2024, amidst concerns over inflation, capital outflows, a stronger dollar, and a weaker rupee. We expect inflation to moderate in Q4 FY25, but there are risks that growth may fall short of the current projection of 7 per cent for H2 FY25. This could prompt the RBI to ease rates in February, signaling a more accommodative stance as it navigates the delicate task of balancing India’s economic growth amidst uncertain global and domestic conditions,” said Suman Chowdhury, Executive Director and Chief Economist at Acuite Ratings.

So, what’s next? Governor Das is unlikely to announce a rate cut due to ongoing inflation concerns. Instead, he is expected to adopt non-rate measures, such as a reduction in the cash reserve ratio (CRR) on Friday. The CRR is the percentage of liquidity that banks must keep with the central bank without earning interest. A reduction in this ratio would leave banks with more liquidity.

According to Chowdhury, a CRR cut is a likely option. A CRR reduction would inject liquidity into the banking system, providing a cushion for economic activity without directly affecting the repo rate. Between December 2024 and February 2025, there is a significant likelihood of a 50-basis-point cut in CRR, bringing it down to 4 per cent from the current 4.5 per cent.

Growth Concerns

Another key aspect to watch in the upcoming meeting is a possible revision of the growth forecast by the Governor. The RBI had earlier projected a 7.2 per cent growth rate for the ongoing fiscal year, but the lower-than-expected GDP in Q2 has led analysts to revise their growth forecasts downward. As a result, the RBI's commentary on the growth outlook will be closely scrutinized.

Changing Analogies

An intriguing element of this meeting is the shift in the analogies used by the RBI Governor. In previous statements, Das has compared inflation to both an elephant and a horse. In the October MPC meeting, he likened inflation to a horse that had been brought into the stable, saying, “Now we have to be cautious in opening the gate, as the horse may simply bolt again.” With this, Das was highlighting how inflation had been tamed and brought closer to the tolerance band.

In August, he referred to inflation as an elephant in the room that had gone for a walk, stating, “We want elephants to stay in the forest on a durable basis.” It will be interesting to see how Das describes inflation, growth, and liquidity this time. As he explained in the last MPC meeting, when asked about the shift from the elephant to the horse analogy, Das remarked, “In war, both horses and elephants are used.” This time, the battle is not just to tame inflation but also to foster growth.