Following the Reserve Bank of India’s (RBI) forecast of over 7% GDP growth for the entire financial year 2024-25, a recent State Bank of India (SBI) report has highlighted that such a scenario of rate cuts accompanying high growth rates has rarely, if ever, occurred in India or globally.
Despite the strong economic growth momentum, the SBI report raises whether the RBI is setting the stage for a potential rate cut.
“Perhaps a 7% growth with a rate cut has never happened in India’s history or in global economic history,” the report says, highlighting that the possibility of such a move by the RBI is highly unusual.
Typically, central banks implement rate cuts when economic growth is slowing, not when it is accelerating. The SBI report points out that such a move would be unprecedented, apart from a brief period in 2016, when the new Monetary Policy Committee (MPC) assumed control.
“This raises an interesting question as to whether the RBI is preparing the grounds for a future rate cut in alignment with the current growth trajectory,” the report suggests.
The analysis highlights that most nations, including India, generally introduce rate cuts during periods of declining growth. The report draws attention to the fact that, except for the Philippines, countries that have implemented rate cuts have typically done so when their GDP growth was lower than the average of the preceding four quarters. In contrast, India’s projected growth remains strong, making the prospect of a rate cut all the more remarkable.
The SBI analysis also hints that the RBI may be giving markets sufficient time to prepare for a potential shift in monetary policy, suggesting that the central bank is carefully monitoring both growth and inflation trends.
“With strategic foresight, the RBI is clearly signaling to markets, allowing ample time to prepare for an eventual monetary policy pivot,” the report adds.
During the latest Monetary Policy Committee (MPC) meeting, RBI Governor Shaktikanta Das projected India’s real GDP growth for FY25 at 7.2%. He outlined robust growth figures for the upcoming quarters: 7% in Q2, 7.4% in Q3, and 7.4% in Q4. The projection for Q1 of the next financial year (2025-26) is 7.3%, with risks evenly balanced.
Governor Das emphasized that strong quarterly performances would continue to drive growth throughout the fiscal year.
(Inputs from ANI)