Monetary Policy Has to be Forward Looking

Foreign investors have stepped up buying of Indian government bonds in the last four sessions, after weaker-than-expected economic growth data last week spurred expectations of monetary policy easing by the central bank.

According to data from the Clearing Corporation of India, these investors net purchase bonds worth more than INR 9,000 crore ($1.06 billion) as of Wednesday. Given prospects of monetary policy easing, which has probably aided inflows, the market is viewing bonds favourably.

Regarding the rupee, Nomura stated that if there are no indications of growth stability, the foreign sector will continue to be under pressure because India is a major source of growth capital, which would further devalue the currency.

The repo rate cut would tackle the ongoing demand slowdown, while the CRR cut is expected to inject durable liquidity into the system following significant forex interventions. The CRR was last increased by 50 bps to 4.5 per cent on May 21, 2022, while the Repo rate was last increased by 25 bps to 6.5 per cent on February 8, 2023. 

The current economic situation can be improved majorly through the monetary policy actions. Leaving it too late for the Budget 2025 to do the heavy lifting is not a wise thought.

Inflation is still low when vegetables and other volatile goods are excluded, rather than being widespread. Food inflation has been a source of annoyance to the RBI. 

As per media reports, the Central Government is developing a bold plan to cultivate pulses on two million hectares of arable land nationwide as food costs rise due to declining production and increased imports. Farmers will be urged to cultivate urad, masur, and tur (arhar) types. Many such measure are require to bridge the demand-supply mismatch in the food basket.

The RBI is set to decide its course of action on December 6, in what can be seen as one of the most anticipated MPC statements in the last 4 years. Striking the right balance between doing nothing at all and throwing the kitchen sink is the need of the hour, and of course the nation.

Excerpt from the RBI Act 1934: "The primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth."

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