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Concerns about slowing growth in Asia’s third-largest economy are surfacing in policymakers’ public comments, with the government pushing for lower interest rates while the central bank insists on meeting its inflation target first.
“Bank interest rates will have to be far more affordable” to help businesses grow, Finance Minister Nirmala Sitharaman said at an event in Mumbai on Monday. There are “many different voices saying the cost of borrowing is really very stressful.”
Sitharaman follows Trade Minister Piyush Goyal’s appeal last week for a cut in borrowing costs to boost growth. Reserve Bank of India Governor Shaktikanta Das, who has kept rates unchanged for almost two years, had refrained from responding to Goyal’s remarks, but in his speech later in the day said the economy was “sailing through smoothly.”
“Growing difference in perception on growth between the fiscal and monetary sides is possibly spilling over into their reaction,” said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd. “There’s a sense of acknowledgment that the government is not going to see the kind of growth as envisaged.”
The RBI projects an expansion of 7.2% for the current fiscal year through March 2025, versus the government’s own forecast of 6.5%-7% growth rate. Analysts, including those at investment banks like Goldman Sachs Group Inc. anticipate growth of as low as 6.5% amid a slowdown in urban demand for everything from soaps to vehicles.
Despite these concerns, Das has justified keeping rates high, saying there are significant risks to inflation from rising global commodity prices and continuing geopolitical conflicts. Data last week showing a jump in India’s inflation to above the central bank’s target has dashed hopes of a cut at RBI’s Dec. 6 meeting.
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“Food inflation is still a question mark while growth is resilient, which gives the RBI the room to be conservative,” said Vikas Goel, managing director at PNB Gilts Ltd. “I suspect monetary policy will remain a status quo in December, and that will keep bond yields underpinned.”
However, economists don’t view the differing views on the growth outlook as a sign of discord between the government and the RBI.
“Right now it seems the monetary and fiscal authorities are working in tandem,” said Devendra Kumar Pant, Chief Economist at India Ratings & Research, the local unit of Fitch Ratings. The RBI is focused on curbing inflation and the government is aiding that effort by keeping expenditure low, he said.
Sitharaman said the government is monitoring the economy closely and is prepared to take “all necessary measures” to increase activity.
“There is no cause for undue concern,” she said, citing strong economic fundamentals.
--With assistance from Bhaskar Dutta and Ruchi Bhatia.
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