The Indian government partially blamed the central bank of this South Asian country for the tight monetary policy, saying that the corresponding strategy of the financial regulator is the reason for the weak performance of the local economy, and stating expectations that growth in the second half of fiscal year is likely to accelerate amid increased demand and easing restrictive measures.
The Finance Ministry’s Department of Economic Affairs said in its monthly economic review for November that the combination of stance monetary policy and the central bank’s macroprudential measures may have contributed to the slowdown in demand.
The South Asian country’s financial regulator has kept interest rates unchanged for almost two years. Former Governor Shaktikanta Das sought to decrease inflation to a target of 4% on a durable basis. It is worth clarifying that this approach provided that no decision should be made on monetary policy easing until the mentioned indicator is reached. Senior government ministers, including Finance Minister Nirmala Sitharaman, have called for lowering borrowing costs to support economic growth. It is worth noting that in the period from July to September, the rate of upward dynamic of the gross domestic product (GDP) of the South Asian country unexpectedly slowed to 5.4%. This indicator is the lowest in the last seven quarters.
Some economists have revised down their forecasts for India’s annual economic growth since the mentioned disappointing data on GDP growth rates were published. Experts also expect that the new Governor of the central bank of the South Asian country, Sanjay Malhotra, will lift some of the restrictive measures. Moreover, they predict that in February, the financial regulator of India will make a decision on cutting interest rates.
Expectations regarding the economic growth of the South Asian country have been revised, in particular, by Goldman Sachs Group. Goldman Sachs experts predict that India’s GDP will increase by 6% in the fiscal year ending in March. It is worth noting that the previous version of the projection provided for a 6.5% growth in the mentioned indicator. In the context of the new forecast, it was separately highlighted that urban consumption remains pale against the background of weak incomes, while rural consumption increase is cyclical.
Falling wages, decreasing company profits, and high inflation have become factors of a kind of downward impact on India’s economic growth. Against this background, several government ministers began to call for lowering the cost of borrowing.
The Department of Economic Affairs said in its report that there are reasons to believe that the outlook for economic growth in the second half of fiscal 2024-2025 will be better than in the first half of this period.
Shaktikanta Das, in the last meeting he chaired in December, left interest rates unchanged. At the same time, it was decided to lower the cash reserve ratio by 50 basis points to 4%. The Department of Economic Affairs described the decision as good news. It was noted that lowering the cash reserve ratio should help accelerate the rise of lending, which has slowed down very much and quickly.
The Department of Economic Affairs predicts that the Indian economy will grow by 6.5% in the fiscal year ending in March. The previous version of the projection stipulated that the mentioned indicator would range from 6.5% to 7%.
The central bank also revised down its forecast for the growth of the Indian economy for the fiscal year, which ends in March. The financial regulator currently expects the GDP of the South Asian country to increase by 6.6% over the mentioned period. It is worth noting that in the last fiscal year, India’s economic growth was 8.2%.
The mentioned report also highlighted that the South Asian country’s growth outlook in the next fiscal year for the coming years is bright when viewed through the lens of Indian domestic economic fundamentals, but is also subject to fresh uncertainties.
The Department of Economic Affairs said that a sign of sustained rural demand is an increase in sales of two- and three-wheeled vehicles and domestic tractors in October and November. It was also noted that the recovery of urban demand is evidenced by significant growth in passenger traffic by air in the specified period. At the same time, attention was drawn to the risks to global economic growth. In this context, it was separately noted that world trade in the run-up to 2025 is facing uncertainty related to the potential possibility that Washington may raise tariffs on imported goods after Donald Trump returns to the White House in January. Many experts emphasize that the implementation of appropriate measures will provoke an increase in tension in the international trade space. Moreover, the tariff growth will worsen the current situation in the area of geopolitical relations, which is already negative, making a consistent movement along the trajectory of deterioration and having signs of a fundamental crisis.
The Department of Economic Affairs stated that emerging market currencies are facing turmoil as a result of advanced economies’ policies, which limits their ability to maneuver. Separately, it was noted that the corresponding state of affairs will put pressure on the minds of monetary policymakers in emerging economies.
Last Thursday, December 26, the Indian rupee fell to a new record low of 85.2650 against the dollar.
It is worth noting that, despite the difficulties and weakening of the upward dynamic, the economy of the South Asian country continues to be one of the fastest growing in the world.
