Economists Caution Against RBI Rate Cuts Amid Rising Inflation Concerns
As India’s retail inflation surged to a 14-month high of 6.2% in October, economists have voiced strong concerns over the Reserve Bank of India (RBI) reducing interest rates in the face of persistent inflationary pressures. This debate has gained momentum ahead of the RBI’s upcoming monetary policy meeting in December, with experts warning that a premature rate cut could undermine the progress made in controlling inflation.
The Indian government has been advocating for lower interest rates, emphasizing the need to make borrowing more affordable to stimulate industrial activity and job creation. Finance Minister Nirmala Sitharaman, speaking at the 11th SBI Banking and Economics Conclave in mid-November, urged banks to lower their lending rates, describing the current borrowing costs as “stressful.” Commerce Minister Piyush Goyal also supported the call for rate cuts, suggesting that the RBI should “definitely” reduce interest rates to support economic growth.
However, leading economists caution that such a move could have destabilizing effects. M. Govinda Rao, an economist and former member of the Economic Advisory Council to the Prime Minister, warned that the large fiscal deficit in India would necessitate higher interest rates. According to Rao, taming inflation requires the RBI to maintain a cautious stance with elevated rates, noting that the central bank has no choice but to stay vigilant.
India’s retail inflation rate remains well above the RBI’s medium-term target of 4%, with food inflation driven largely by rising vegetable prices. The country’s central bank has kept the repo rate unchanged at 6.50% for ten consecutive monetary policy reviews. Economists argue that any reduction in interest rates during a period of high inflation risks undoing the efforts made to control price increases.
While the government’s push for lower rates focuses on accelerating economic activity, economists like Professor Lekha Chakraborty from the National Institute of Public Finance and Policy (NIPFP) argue that the RBI’s neutral stance—where both price stability and economic growth are prioritized—indicates that a rate cut is unlikely in the immediate term. However, Chakraborty suggests that the RBI might take cues from global trends, particularly the actions of the US Federal Reserve, before making any significant policy changes.
The RBI’s monetary policy decisions play a crucial role in shaping India’s economic landscape. By influencing the cost of funds for banks through adjustments in the repo rate, the central bank impacts borrowing costs, investment decisions, and overall economic activity. Higher interest rates generally discourage borrowing, which helps control inflation but can also slow economic growth. Conversely, lowering rates can stimulate growth but may lead to higher inflation if not carefully managed.
In light of these complexities, the RBI’s upcoming policy meeting will be closely watched by both economists and policymakers, with the central bank’s next move expected to balance inflation control with the need to support economic growth. While political pressure mounts for lower borrowing costs, the RBI’s cautious approach to managing inflation continues to be seen as a key element in the country’s long-term economic stability.
