GROWTH VERSUS STABILITY: ROLE OF MONETARY POLICY.

Generally economic policy objectives are attaining higher levels of income output and employment and maintaining stability in the price level and balance of Payments Following the second Quarter of 2024-25  drastic slippage of GDP growth to 5.4  percent occured in July-September (Q2) FY 25 .Consequentlly growth projections have been down graded by different agencies as follows-Bank of Baroda from 7.3-7.4 to 6.6-6.8,ICRA 7 to 6.5-6.7,HDFC Bank from  6.8 to 6.5,IDFC First Bank from 6.6 to 6.3,Kotak Mahindra Bank from 6.7 to 6.1 Goldman Sachs from 6.5 to 6 etc.  Many experts including PronabSen believe that as per the prevailing conditions on a stable basis maximum India can grow during the financial year 2024-25 is  only 6.5%.,Various explanations were given for the decline in Q2 growth.Accorrdingly RBI lowered  its annual growth forecast for Fy 2025 to 6.6% in the current monetaryvpolicy statement. Performance of Q2 growth last year 2023-24 were exceptionally high at 8.11%.Naturally there is the impact of a high base effect for the current year. Government of India's capital expenditure contracted by 15.47% during the first half of 2024-25. Analysis of Gross Value Added (GVA) indicated that agricultural growth of 3.8% during Q2 is relatively good performance. But the secondary sector comprising of manufacturing, electricity, and construction made only 3.3 % growth as against10.5 growth last year. Manufacturing in particular had only 2.2% growth in financial year 2025 as against 14.3 % in Fy 2024.

According to the Monetary policy statement made by RBI Governor on 6th December 2024 " Central Banks are constantly adapting to the new global economic and financial landscape created by geopolitical conflicts, geo economic fragmentation, financial markets voltatility and continuing uncertainties, all of which are testing the resilience of global economy.....Maintaining macroeconomic and financial stability, and building buffers continue to be loadstar for the Emerging Market economies. In India notwithstanding the recent aberration in growth and inflation trajectories, the economy continues its journey on a sustained and balanced path towards progress. Amidst the reshaping of the global economy, India is well positioned to benefit from the emerging trends as it forges ahead on a transformative journey." The Monetary Policy Committee after  making a detailed assessment of  the evolving macro economic and financial outlook and challenges decided by a majority decision of 4-2 to keep the policy repo rate unchanged at 6.50 percent. This decision  is  against the suggestion of  Finance and Commerce  Ministers of the Government and also two academic members of the MPC itself.  Consequentlly the Standing deposit facility rate (SDF) remained at 6.25%,and both Marginal Standing Facility (MSF) and Bank rate at 6.75 percent MPC reduced the cash reserve ratio CRR by 50 basis point to 4%bringing it back to before April 2022 level .This measure will become fully operational from 28th December 2024 which would provide primary liquidity to the  tune of rupees 1.16 lakh crores to the banking system

. Domestic  Growth 

Decline in Q2 growth to 5.4% turned to be very low compared to anticipated levels largely due  to substantial deceleration in industrial growth from 7.4%in Q1 to 2.1% in Q2 due to subdued performance of manufacturing companies,contraction in mining activity and lower electricity demand. On the otherhand rural activities and agricultural growth picked up because of healthy Kharif production and better rabi sowing .While rural demand is doing better  urban demand shows moderation on a high base. Investment activities are expected to improve. In the external sector merchandise exports expanded  by 17.2% in October 2024.Service sector maintained its robust growth of 22.3 in October 2024 with the purchasing  Managers Index of 58.4  as against PMI of 56.5 for manufacturing in November 2024.

Eventhough rural demand is rising steadily urban demand shows some moderation. While government consumption is improving, investment activities needed to pick up. On the external sector merchandise exports expanded by 17.2% in October while service exports recorded upbeat growth of 22.3 % in October. Despite gross FDI has increased at robust pace net FDI remained moderate due to higher repatriation and increasing outflows. Foreign portfolio investment declined whereas non resident investment and external commercial borrowings increased. In order to attract more capital inflows and deposits from non residents RBI has decided to increase the Interest ceilings on FCNR(B) deposits. It may be noted here that inward remittances in India is estimated to reach $124 billion in 2024.in any case since India's Current Account GDP ratio remained around 2% external debt GDP ratio 18,8% foreign exchange reserves remain sufficient enough to meet 12 months import requirements external sector remains both solid stable and resilient and even the depreciation of rupee is comparatively low in relation other national currencies. 

As per December MPC India's consumer price inflation estimate showed increase for 2024-25 from 4.5% to 4.8%,Q3 estimates increased from 4.8 to 5.7 Q4 estimate from 4.2 to 4.5.Similarly  for financial year 2025-26 revised estimate of inflation increased from  4.3 to 4.6 in Q1 and 4 for Q2 respectively . Obviously there is consequent  reduction in GDP growth for financial year 2024-25 from 7.2 % to 6.6%,with reduction in Q3 growth projected from 7.4 to 6.8, and for Q4 from 7.4 to 7.2. For financial year 2025-26 Q1 projection got reduced from 7.3 to 6.9% and Q2 projections remained at 7.3%level. 

Since RBI is bound by it's mandate of maintaining prce stability while supporting growth and inflation particularly food inflation is impacting the disposable income of all segments of society, retaining repo rate unchanged which can be justified for  the time being. Another justification is that while stability in prices and balance of Payments are left to the Central Bank,  growth and employment generation can be largely  left to the fiscal policy. But experience has shown that both are relatively important to  achieve growth with stability. The MPC remains committed to restoring a balance between inflation and growth, which got  unsettled recently.According to Finance Minister dip in Q2 GDP growth is not systemic but largely due to absence of public expenditure, and there are many opportunities like exports of traditional items like textiles,footwearetc.Already economists have advocated a comprehensive manufacturing policy with strategy on import tariff incentives and deregulation to boost private investment. As far as monetary policy is concerned RBI wants more evidence about softtening of inflation prior to reducing policy rates.But by reducing CRR it could inject more liquidity to the system Measures like increasing the limit of collateral free loans to rupees 2 lakhs for farmers and incentives given to non resident accounts are welcome. On the whole the inflation targeting monetary policy needs to appreciated for the time being, limitations if any can be compensated with fiscal and other policies as well.