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India: RBI holds interest rates steady amid inflationary pressures and growth concerns

by admin December 6, 2024
December 6, 2024
India: RBI holds interest rates steady amid inflationary pressures and growth concerns

India’s central bank has opted to maintain its benchmark interest rate at 6.50%, prioritizing inflation control while grappling with a slowing economy.

The Reserve Bank of India’s (RBI) decision, announced on Friday, aligns with market expectations but underscores the delicate balancing act required to sustain growth in Asia’s third-largest economy.

This comes as inflation surges and GDP growth shows signs of deceleration, raising concerns about the economic outlook for the year.

The move to keep interest rates steady was widely anticipated after India’s retail inflation climbed to a 14-month high of 6.21% in October, breaching the RBI’s tolerance ceiling of 6% and significantly exceeding its target of 4%.

The spike in consumer prices adds to the pressure on policymakers to navigate a path that controls inflation without stifling economic activity.

Economic growth has also slowed markedly.

During the July-September quarter, the Indian economy expanded by 5.4% year-on-year, well below the 6.5% growth projected by economists in a Reuters poll.

This marked the slowest growth rate in nearly two years and raised doubts about the government’s forecast of 7.2% growth for the fiscal year ending March 2025.

Amid these challenges, calls for lower borrowing costs have gained traction.

Finance Minister Nirmala Sitharaman and Trade Minister Piyush Goyal have emphasized the need for more affordable interest rates to boost industrial investment and consumer demand.

Sitharaman, speaking at a recent event in Mumbai, stressed, “At a time when we want industries to ramp up and build capacities, bank interest rates will have to be far more affordable.”

RBI Governor Shaktikanta Das has cautioned against premature rate cuts despite these appeals.

In the October policy meeting, the central bank shifted its stance from “withdrawal of accommodation” to “neutral,” signaling a pause rather than a pivot toward monetary easing.

Das reiterated the risks of cutting rates too soon, emphasizing that such a move could destabilize the economy.

The RBI’s position is further complicated by the performance of the Indian rupee, which recently hit an all-time low of 84.659 against the US dollar.

Any immediate monetary easing could exacerbate currency pressures and trigger capital outflows.

LSEG data highlights the rupee’s vulnerability amid global economic uncertainty, particularly as major central banks adjust their monetary policies.

On the markets front, India’s Nifty 50 index has demonstrated resilience, rising modestly since the GDP figures were released and showing a 13.7% year-to-date gain.

In contrast, the MSCI Asia ex-Japan index, which has significant exposure to India, has declined around 12% during the same period.

Indian bonds have also seen fluctuations, with the 10-year benchmark yield hitting its lowest point since February 2022 earlier this week before rising slightly post-RBI decision.

As Shaktikanta Das prepares to conclude his term as central bank governor later this month, the RBI’s cautious approach highlights the complexities of managing inflationary risks without derailing growth.

With inflationary pressures persisting and growth momentum slowing, India’s policymakers face tough decisions in the months ahead.

The post India: RBI holds interest rates steady amid inflationary pressures and growth concerns appeared first on Invezz

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