With inflationary pressures continuing and growth losing momentum, the RBI Monetary Policy Committee (MPC) had a challenging task in hand. The MPC chose a cautious approach and with continued focus on inflation, maintained a status quo on policy interest rates and the stance.

However, to provide comfort on liquidity front, the CRR was cut by 50 bps. With inflationary risks emanating from domestic food prices and geo-political conflicts, the central bank chose a wait-and-watch approach on policy interest rates. While remaining cautious, the RBI did not seem to be overly concerned on the growth front.

CPI inflation rose to 6.2 per cent in October, above the RBI’s target band and is expected to remain high in Q3 FY25. The spike in CPI inflation is mainly because of food inflation that is at a high of 7.8 per cent (average of last three months), while core inflation remains benign at around 3.5 per cent.

Food culprit

Even in food inflation, the main culprit is vegetable price inflation that shot up by a sharp 42 per cent in October and has been at a monthly average of 25 per cent in the current fiscal year. In fact, CPI inflation excluding vegetable prices has been at a benign average of 3.5 per cent in the current fiscal.

Another concerning aspect is the recent spike in edible oil prices. Inflation in this segment shot up to 9.5 per cent in October in response to spike in global prices and increase in domestic import duty. While food inflation is due to supply side factors, the RBI has highlighted in the past their concern around inflationary pressure getting broad based.

To add to the domestic inflationary woes, there are global inflationary concerns due to geo-political conflicts, threats of a trade war and financial market volatility. RBI has revised upwards its average inflation projection for FY25 to 4.8 per cent, in line with our expectations. With fresh harvest coming into the market, food inflation is expected to moderate to around 6.5 per cent by the end of the fiscal year.

With GDP growth in Q2 sharply lower than expected, the RBI has lowered the full year growth estimate for FY25 to 6.6 per cent from earlier estimate of 7.2 per cent.

One major reason for slower economic growth has been poor capex spending by the Centre and State governments. The Centre has achieved only 42 per cent of the budgeted capex in the first seven months of this fiscal, while on a consolidated basis State governments have only achieved 28 per cent in the first six months.

We expect the government’s capex spending to improve in the coming quarters and that should be supportive of growth. Private investment is also expected to improve, going by the healthy growth in order book of capital goods and road construction companies.

Farm effect

Healthy agriculture production and consequent easing of food inflation should be supportive of overall improvement in consumption. Hence, we expect economic growth to improve in the second half of the year. However, our GDP growth projection for FY25 at 6.5 per cent is marginally lower than RBI’s projection.

The systemic liquidity had become tight with persistent capital outflows and the 50 bps cut in CRR will help improve the situation. This measure will help release liquidity of around ₹1.2 lakh crore in the system. This in turn will ease short-term rates and prepare the ground for a policy rate cut in the coming quarter.

Expected moderation of India’s economic growth to around 6.5-6.6 per cent in FY25 is not alarming, but it warrants attention as the country moves away from 7-8 per cent growth recorded in the last two years.

Hence RBI will be looking at providing monetary policy support to growth as food inflation moderates. CPI moderation in Q4 FY25 should provide that window of opportunity to the central bank to start a shallow rate cutting cycle. We expect RBI to cut the policy rate by 50 bps in two tranches in 2025.

The writer is Chief Economist, CareEdge Ratings