India's surprisingly strong economic performance in the second quarter is likely to influence the Reserve Bank of India's upcoming monetary policy decision, with most analysts predicting the central bank will maintain current interest rates. The economy expanded by 7.6% year-on-year during the July-September quarter, significantly exceeding expectations and providing room for the RBI to continue its pause on rate changes.
Economic Growth Exceeds Expectations
The latest GDP data released on November 30 revealed that India's economy grew at a faster pace than most economists had projected. The 7.6% growth in Q2 FY24 follows an even more impressive 7.8% expansion in the first quarter, demonstrating the economy's resilience despite global headwinds and domestic challenges.
This robust performance across multiple sectors has given the Monetary Policy Committee sufficient reason to maintain the current policy stance when they meet from December 6 to 8. The RBI has kept the repo rate unchanged at 6.5% since February 2023, after implementing a series of rate hikes totaling 250 basis points beginning in May 2022 to combat rising inflation.
Inflation Concerns Remain Key Factor
Despite the encouraging growth figures, inflation continues to be a significant concern for policymakers. Consumer price inflation moderated to 4.87% in October, moving closer to the RBI's medium-term target of 4%. However, food price volatility remains a persistent worry that could influence future policy decisions.
Analysts from leading financial institutions including ICRA, Bank of Baroda, and QuantEco Research have indicated that the current economic conditions support maintaining the status quo on interest rates. The strong GDP growth reduces the urgency for stimulus measures, while the still-present inflation risks prevent any consideration of rate cuts in the immediate future.
Balancing Growth and Price Stability
The RBI faces the delicate task of supporting economic expansion while ensuring price stability. The current GDP growth trajectory suggests the economy can withstand the existing interest rate environment without significant negative impact. Manufacturing and construction sectors have shown particular strength, contributing substantially to the overall growth figure.
Most economists now anticipate that the RBI will maintain its withdrawal of accommodation stance while keeping rates steady. The focus is likely to remain on managing liquidity conditions and monitoring external factors that could affect both growth and inflation, including global commodity prices and geopolitical developments.
The monetary policy committee's decision, expected on December 8, will be closely watched by markets, businesses, and consumers alike for signals about the central bank's assessment of economic conditions and its policy direction in the coming months.
