Monetary Policy and Inflation Growth Balance
The RBI’s Monetary Policy Committee (MPC) aims to restore the balance between inflation and growth, which has been unsettled recently.
The RBI will use various policy tools to achieve this balance, with a focus on reducing inflation for sustainable growth.
Timing, prudence, and practicality will guide future actions to stabilize the economy.
Growth Projections
The RBI has revised India’s growth projection for FY25 from 7.2% to 6.6%, due to a slowdown in the second quarter.
The decline is considered a cyclical correction, and growth is expected to rebound in the second half of the year, with projections rising to 6.9%-7.3% by 2025-26.
Liquidity Concerns
Tight liquidity is expected due to tax-related outflows and increased demand for cash during the festive and agricultural seasons.
Capital outflows from Foreign Portfolio Investors (FPIs) in recent months may add to the liquidity crunch.
The temporary increase in the Cash Reserve Ratio (CRR) has served its purpose and is expected to normalize.
Impact of Inflation on Growth
Inflation has been higher than expected in recent months, driven by food inflation due to weather factors.
This inflation has impacted the growth outlook, as higher prices reduce consumer spending and investment.
The RBI aims to restore balance by bringing inflation closer to the target.
RBI is in regular discussions with the government on inflation matters, though specific discussions about delinking food inflation from the overall inflation target have not been shared.
Manufacturing and Investment Slowdown
A key factor in the slowdown is reduced investment, particularly in manufacturing, due to weaker demand and inflation.
Lower sales growth in urban areas has led companies to avoid investing in new assets, which further hampers growth.
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