As India’s economic growth hit a seven-quarter low of 5.4% for the July-September period, the gulf between the Reserve Bank of India (RBI) and the government widened further, with concerns rising over the RBI’s policy actions and their potential impact on economic growth. Internal discussions within the government have raised questions about the RBI’s upward revision of India’s GDP growth forecast for 2024-25 from 7% to 7.2% in June, which some officials felt did not align with the prevailing economic signals. The government has expressed concerns that the RBI’s prudential measures, including its tight monetary policy stance, could be hurting growth prospects, particularly through high interest rates.
A senior government official pointed out that the RBI’s decision to maintain the key policy rate at 6.5% since February 2023, amidst rising inflationary pressures, has resulted in high real interest rates for non-food sectors, which could dampen economic activity. While the RBI has defended its actions, analysts tracking its policies argued that the upward revision of growth forecasts was based on strong momentum from the previous fiscal year, and that slower growth in Q1 and Q2 this year was largely due to external factors like delayed monsoons and disruptions in key sectors like construction and mining.
The central bank’s measures to curb credit exuberance, such as raising risk weights on unsecured loans and tightening regulations on digital lending, have been seen by the government as well-intentioned but potentially damaging to credit growth. Government officials argue that the RBI’s focus on reducing the credit-deposit ratio, which led to a sharp moderation in credit growth from 16% to around 11% since January, has inadvertently slowed down the economy. The government is particularly concerned that the RBI’s actions could dampen credit demand, as a decrease in credit growth also leads to reduced deposit growth.
The RBI, however, maintains that its measures are necessary to prevent a financial crisis by addressing unsustainable credit growth, particularly in sectors like credit cards and unsecured loans. Despite concerns about the high cost of credit, the RBI continues to prioritize controlling inflation, particularly food inflation, which has surged due to supply-side issues with perishables like tomatoes, onions, and potatoes.
With the RBI’s term set to end on December 10, all eyes are on the upcoming monetary policy review between December 4-6. Government officials have indicated that while they appreciate the need for prudential measures, they are increasingly worried that the RBI’s policy stance is becoming too restrictive and could hinder the recovery of India’s economy.
