RBI MPC Meeting: What India’s Q2 GDP Performance Means

The Reserve Bank of India’s RBI MPC Meeting, led by Governor Shaktikanta Das, is currently deliberating its fifth monetary policy decision for the financial year 2024-25. The meeting, which began on December 4, 2024, occurs amid significant economic challenges, with India’s Q2 GDP growth falling to a two-year low of 5.4% YoY.

The MPC faces a delicate task: to balance the need for economic growth with inflation control. The slowdown in GDP and rising inflationary pressures will heavily influence its policy stance.

India’s Q2 GDP Report: Key Highlights

India’s Q2FY25 GDP growth underperformed expectations, driven by weak private consumption and lower private investment activity:

1. Private Consumption: Growth decelerated to 6% YoY from 7.4% in the previous quarter, indicating subdued demand in urban markets.
2. Investment Spending: Dropped to 5.4% YoY compared to 7.5% in Q1, signaling a slowdown in private investment despite robust public sector capital expenditure.
3. Industrial Output: Mining contracted slightly (-0.1% YoY), while manufacturing growth slowed to 2.2% YoY from 7% in Q1, reflecting weaker production and earnings.
4. Agriculture: Agriculture showed resilience, growing at 3.5% YoY, supported by strong Kharif output and expectations of a better Rabi harvest.
5. Public Administration and Defense: Growth in this sector remained robust at 9.2% YoY, driven by increased government spending.

The data points to broad-based economic weakness, with private consumption and investment—the primary drivers of growth—facing significant challenges.

Signs of Recovery in H2FY25

Despite the Q2 slowdown, there are early indicators of recovery in the second half of FY25:

• Diesel and Festive Vehicle Sales: Diesel sales and vehicle purchases surged in October, reflecting improved industrial activity and festive demand.
• Export Growth: Goods exports rose by 17% YoY in October, marking the highest growth in 28 months, with electronics exports increasing by an impressive 46% YoY.
• Government Expenditure: Post-election spending by the government has picked up, further supporting the economy.

Economists anticipate H2 growth to reach approximately 6.5% YoY, bolstered by lower food inflation, better agricultural output, and sustained public spending. However, private-sector participation remains weak, raising concerns about long-term sustainability.

RBI MPC Meeting: Challenges and Likely Actions

The ongoing RBI MPC Meeting is expected to address the dual challenges of decelerating growth and rising inflation. Here’s what to expect:

1. Revised GDP Projections:
   • The RBI MPC Meeting may lower its FY25 GDP growth forecast from 7.2% YoY to around 6.3%.
   • With H1 growth averaging only 6%, a sharp recovery in H2 will be needed to meet even the revised target.
2. Inflation Adjustments:
   • Inflation projections for FY25 could rise from 4.5% to around 4.8%-5.5%, reflecting persistent price pressures, especially in food.
3. Interest Rates:
   • The RBI MPC Meeting is likely to keep the repo rate unchanged at 6.5% to maintain stability while monitoring inflation and growth.
   • A neutral policy stance is expected to allow flexibility for future adjustments.

Focus on Liquidity Measures

Experts believe that instead of reducing interest rates, the RBI could adopt liquidity-enhancing measures to support growth. Mandar Pitale, Head of Treasury at SBM Bank India, suggests two potential strategies:

• Cash Reserve Ratio (CRR) Cuts: A phased reduction of 25 basis points over the next few months could inject liquidity into the banking system.
• Open Market Operations (OMOs): Purchasing government securities to infuse durable liquidity without altering the policy rate.

Such measures could provide much-needed support to the economy without compromising financial stability.

Sectoral Insights Informing Policy

The Q2 GDP data offers several takeaways that may influence the RBI MPC Meeting’s decisions:

• Private Sector Weakness: Sluggish private consumption and investment highlight the need for targeted policy interventions to boost demand.
• Agriculture and Exports: Strong performance in agriculture and exports, particularly in electronics, offers some relief amid broader economic challenges.
• Government Spending: Increased expenditure by the public sector continues to drive growth in areas like public administration and defense.

Navigating the Growth-Inflation Trade-Off

The RBI MPC Meeting’s task is to balance the need for economic growth with inflation control. Here’s how the RBI is expected to approach this challenge:

• Support Growth: Liquidity-enhancing measures like CRR cuts or OMOs could stimulate the economy without altering the interest rate framework.
• Manage Inflation: With inflationary pressures likely to persist, aggressive rate cuts are off the table to avoid exacerbating price instability.

Conclusion: A Critical Policy Moment

The Q2 GDP slowdown underscores the challenges facing India’s economic recovery. While H2FY25 shows promise, driven by favorable agricultural trends and increased government spending, weak private consumption and investment remain significant hurdles.

The RBI MPC Meeting in December is pivotal, as its decisions will shape the trajectory of India’s economy for the remainder of FY25. By focusing on liquidity measures and maintaining a neutral stance, the RBI can address immediate growth concerns while safeguarding long-term macroeconomic stability.

The outcomes of this meeting are crucial for navigating India’s economic challenges and ensuring sustainable growth amid global uncertainties.

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