Finance Ministry Links Economic Slowdown to RBI Policies and Structural Factors
A report from the Finance Ministry, released on Thursday, indicated that the slowdown in economic growth could be partly attributed to the combination of the Reserve Bank of India’s (RBI) monetary policy stance, macroprudential measures, and structural factors. This marks the first official acknowledgment from the ministry about the slowdown, suggesting that the RBI’s policies may have played a role in the slowdown of demand.
India’s growth rate dropped to 5.4% in the July-September period, the lowest in seven quarters. This has increased pressure on the RBI to reduce interest rates to stimulate growth. However, the central bank has focused on controlling inflation and decided to keep interest rates unchanged for the 11th consecutive time in December, citing persistent inflation concerns. The slowdown in urban consumption has also raised concerns among policymakers who are working to revive economic growth.
The Finance Ministry’s monthly economic report noted that while there are reasons to believe that growth in the second half of FY25 could improve, it also acknowledged that structural factors may have contributed to the slowdown in the first half. The report also praised the RBI for reducing the cash reserve ratio (CRR) from 4.5% to 4% in its December policy meeting, which is expected to help boost credit growth, which had slowed significantly in FY 2024-25.
The report also pointed to hiring and compensation practices in the corporate sector as factors that have contributed to the slowdown in urban consumption.
Looking ahead, there are expectations that the RBI may cut rates in February under a new monetary policy framework, with Sanjay Malhotra, the new RBI governor, taking over from Shaktikanta Das earlier this month. However, some experts caution that reducing rates in February may be challenging due to global uncertainties.
Finance Minister Nirmala Sitharaman had previously stated that the slowdown in government spending during the April-June quarter was due to the general elections and expressed optimism for a recovery in the current quarter. The Finance Ministry’s report maintained that the growth target for the current fiscal year remains at 6.5%, though it warned of emerging global uncertainties that could affect the outlook.
The report highlighted concerns over global trade growth, which is now more uncertain than before, and the risks posed by elevated stock markets. It also noted that the strength of the US dollar and shifts in US policy rates have put pressure on emerging market currencies, which may influence the monetary policies of these countries.
Despite these challenges, the report pointed out that inflationary pressures eased in November 2024, driven by lower food and core inflation. The arrival of fresh produce in the market helped reduce vegetable price pressures, offering some relief.
