Soumya Kanti Ghosh, Member, 16th Finance Commission, and group chief economic advisor, State Bank of India
The Keynesian approach to policy-making, “When the facts change, I change my mind. What do you do, sir?”, comes to one’s mind as the Monetary Policy Committee (MPC) on Wednesday assiduously walked the talk (in unison), balancing a dotted line that passes through shifting sands even as geopolitical uncertainty joins hands with tactical provocations (the US has just raised tariffs on Indian imports to 50%).
A tell-tale sign that could possibly have tilted the MPC’s decision to go for a pause on rate decisions, after the booster shot given in the last meeting, could be the volatile atmosphere engulfing the economy where keeping the dry powder handy is more important than firing the salvo now in anticipation. The MPC’s deliberations could be split almost equally between indigenous and exogenous factors (muted growth and slowing pace of disinflation challenging policymakers globally while a new equilibrium arises in a new global order, as the governor put it) to gauge patiently the aftermath of tariff impacts that may come with a lag as stockpiling, and advanced shipping and purchases somewhat camouflage the early numbers of Q1/H2 across borders.
The challenges before the economy can be gauged from the deceleration in banks’ incremental non-food credit, which grew at a tardy pace of 9.8% as on July 11 (year-to-date) against 14% a year ago. However, the slowdown is not new (though more apparent now) since the systemic credit growth had dipped by 15.9% in FY25 itself (clocking growth of Rs 18 lakh crore against Rs 21.4 lakh crore in the preceding financial year). Barring micro, small, and medium enterprises, all sectors have shown poor offtake in credit on a year-on-year basis, according to Q1 FY25 data, with real estate and personal loans declining the most.
The MPC has estimated real GDP growth for FY26 at 6.5%, with 6.5% for Q1, 6.7% for Q2, 6.6% for Q3, and 6.3% for Q4, while real GDP growth for Q1 FY27 is projected at 6.6% with risks evenly balanced. This should be read in conjunction with the uneven trajectory of inflation, low in absolute terms now but likely to edge up next year, according to the RBI.
Thus, the MPC projection of an inflation rate at 3.1% from the previously estimated 3.7% correctly underlines the inflation trajectory as benign. However, in Q1 FY26 inflation is likely to edge up to 4.9% according to RBI projections, and hence the bar for a rate cut has now become even higher.
Interestingly, the quasi-leading indicators are showing a mixed trend. While indicators like the purchasing managers index (both manufacturing and services that capture the intent of decision makers) have shown an uptick and coupled with growth in core sectors (steel consumption and cement production), tax collections—both direct and indirect—have shown signs of deceleration. This ambiguity of data and its slightly deceptive tone, combined with
factors other than inflation (adequate returns to savers), could have held the hands of the MPC from tilting perhaps in favour of a rate cut.
On the development and regulatory policy front, two measures were announced. The introduction of auto-bidding facilities in RBI Retail Direct for investment and re-investment in treasury bills was announced in RBI Retail Direct. The RBI proposed to standardise the procedure for settlement of claims in respect of deposit accounts of deceased bank customers. At the end of June, there was around Rs 67,003 crore of unclaimed deposits with banks. Additionally, to enhance accessibility and simplify the search process for unclaimed deposits, the RBI has already launched the centralised web portal UDGAM (Unclaimed Deposits-Gateway to Access Information) for the public. However, the synchronised policy across banks may help the nominee/legal heirs and also reduce the burden on banks.
To cut a long story short, we may dub Wednesday’s pause as the “technical pause” as the inflation projections
are hovering in the band of uncertainty (while below 3% till Q3, it may sharply increase to 4.9% in Q1 FY27). Under such a scenario (along with the expectations of robust GDP growth), we believe that if the RBI’s inflation projections for FY26 remain correct then a 5.5% repo rate may be the terminal rate.
However, our in-house estimates point to an even lower inflation print vis-à-vis the RBI’s projections; up to 70 points lower, which increases the onus of a rate cut by the regulator going forward although time is of the essence. Can there then be a rate cut with a large intervening gap from June, even when growth is supposed to be strong on a front-loaded basis (Q1 and Q2 growth is strong according to RBI projections with Q2 being even higher than Q2, thus rate cuts in October and December look a tad difficult) and inflationary concerns significantly in check?
We think the Keynesian adage may need a little future-ready tweak. What do you all say, sirs?