Much higher headline growth number than expectation has caused differences among economists on policy interest rate. Interestingly both sides use lower inflation and higher growth rate for making their case for pause or rate cut.
The Monetary Policy Committee (MPC) will meet for 5th time during the current fiscal year between December 3 and 5 to review the policy interest rate. During its last two meeting (August and October), it went for pause after three successive rate cuts, totalling 100 basis points.
On November 28, Statistics Ministry reported headline growth number at 8.2 per cent, highest in six quarters. This is much higher than RBI’ projection of 7 per cent and also various agencies’ expectation of 7.5-8 per cent.
The Chief Economic Advisor V Ananta Nageswaran is saying that full year growth could be 7 per cent per cent or even more as against economic survey’s projection of 6.3 to 6.8 per cent.
This growth number has come at a time, when another key high frequency economic indicator, retail inflation based on Consumer Price Index (CPI) dipped to 0.25 per cent in October, which is lowest in the current series, with the base year of 2012.
This pushed the hope for a policy interest rate cut by the MPC. Some, economists feel, higher growth number will not deem this prospect.
“Even while the Q2 GDP growth number is higher than expected, we feel the RBI could still cut policy rate in the upcoming meeting,” Chief Economist with CareEdge said.
Further, the very low inflation currently would give RBI the opportunity to cut rate as growth moderates in the second half of the year and trade related uncertainties linger. “The RBI will also consider that a part of the high growth in H1 FY26 is because of statistical factors,” she said.
Chief Economist, Kotak Mahindra Bank also have the same feeling. “The sharply higher than expected 2QFY26 GDP was broad based but comes on the back of a very low deflator. The single digit nominal GDP growth continues to signal tepid underlying activity. Despite the high real GDP growth, we retain our expectations of 25bp of rate cut in the upcoming policy as inflation trajectory remains benign,” she said.
However, a note prepared by Barclays had slightly different opinion while acknowledging that growth has peaked and expect growth to slow during second half.
For a forward-looking central banking, as important it is to look through backward encouraging data – both low inflation and solid growth – the GDP print today can’t be ignored.
“In our view while we expect the MPC to pause for now, we expect the tone to be dovish in the December policy statement,” it said while adding that it expects the RBI MPC to revise up their FY25-26 real GDP growth estimate while cut down the inflation forecast.
Senior Economist at DBS Bank has taken a balanced approach. “The MPC faces a challenging act at the December rate review, with the mix of a strong growth print and record low inflation. We expect an emphasis on forward looking growth guidance and high real rate buffer due to weak inflation, to justify a move to lower rates further,” she said.
