Monetary policy stance may have slowed demand: Finance Ministry

A Reserve Bank of India (RBI) logo is seen inside its headquarters in Mumbai.
| Photo Credit: Reuters

The Finance Ministry on Thursday (December 26, 2024) said the “combination of monetary policy stance and macroprudential measures by the central bank may have contributed to the demand slowdown” in the economy — remarks that come two days after a Reserve Bank of India (RBI) monthly bulletin article mooted urgent action to “excoriate inflation” so as to lend a stronger push for consumption and investments.

Although the review asserted that there are “good reasons to believe” that the outlook for growth is better in the second half of the year than it has been through April and September, when GDP rose 6%, the Ministry’s economic division officials rejigged their growth expectations for 2024-25 to “around” 6.5%.

Till late October, the Ministry’s monthly economic reports had maintained this year’s growth will be in the range of 6.5% to 7%. The last review, released a month ago and days before the second quarter growth estimates revealed GDP had risen at a seven-quarter low of 5.4%, had been silent on growth estimates but had expressed cautious optimism about coming months’ economic outlook.

The Ministry’s latest review also flagged that credit growth had slowed this year in India “too much and quickly”, and termed the RBI’s move to lower the cash reserve ratio from 4.5% to 4%, in its December review of the monetary policy as “good news that should help boost” credit flows.

“Sustaining growth will require a deeper commitment from all economic stakeholders to growth,” the review for November underlined, citing new uncertainties that cloud the outlook for 2025-26. The remarks assume significance amid a growing clamour in government for the central bank to cut interest rates in order to spur investments and growth.

While global trade growth is looking more uncertain than before, the review noted that elevated stock markets continue to pose a big risk. “The strength of the US dollar and a rethink on the path of policy rates in the United States have put emerging market currencies under pressure. In turn, that will make monetary policymakers in these countries think more deeply about the path of policy rates. Recent exchange rate movements may have lowered their degrees of freedom,” it averred.

These factors will also weigh on the minds of India’s monetary policy makers, the Ministry acknowledged. “India’s growth outlook in 2025-26 for the coming years is bright when viewed through the lens of Indian domestic economic fundamentals, but is also subject to fresh uncertainties,” the review emphasised.

While a “promising” Rabi harvest ahead will aid in alleviating food inflation pressures over the year, and a downward trend in international crude oil prices should curb price gains, the Ministry noted that elevated global edible oil prices and India’s high dependence on imported edible oil would warrant close monitoring to keep inflation under check.