India’s government partly blamed the central bank’s tight monetary policy for the economy’s weak performance and said growth will likely improve in the second half of the fiscal year as demand picks up and restrictive measures ease.
“The combination of monetary policy stance and macroprudential measures by the central bank may have contributed to the demand slowdown,” the Finance Ministry’s Department of Economic Affairs said in its monthly economic review for November.
The central bank kept interest rates unchanged for nearly two years, with former Governor Shaktikanta Das seeking to bring inflation down to the target of 4% on a durable basis before considering easing. Senior government ministers, including Finance Minister Nirmala Sitharaman, have called for rate cuts to support growth, which unexpectedly slowed to a seven-quarter low of 5.4% in the July-September period.
Several economists downgraded their full-year growth forecasts after the worse-than-expected GDP data, and expect new central bank Governor Sanjay Malhotra to unwind some of the RBI’s restrictive measures, including cutting interest rates as early as February.
“There are good reasons to believe that the outlook for growth in the second half of fiscal 2024-25 is better than what we have seen in the first half,” the Department of Economic Affairs said in its report, released Thursday.
Das left rates unchanged in the last meeting he chaired in December, but lowered the cash reserve ratio by 50 basis points to 4%. The move was “good news,” the department said, and “should help boost credit growth, which has slowed a little too much and quickly.”
It projects growth of 6.5% in the fiscal year through March, compared with an earlier forecast range of 6.5%-7%. That’s in line with the RBI’s sharply revised estimate of 6.6%, and far below last year’s 8.2% expansion.
“India’s growth outlook in FY26 for the coming years is bright when viewed through the lens of Indian domestic economic fundamentals, but is also subject to fresh uncertainties,” according to the report.
The department cited strong growth in two- and three-wheeler sales, and domestic tractor sales, in October and November as signs of resilient rural demand. A notable pickup in air passenger traffic in the period also indicated a recovery in urban demand, it said. However, it highlighted risks to global growth and said global trade next year was becoming uncertain amid threats of higher tariff by the US.
Emerging market currencies are facing turmoil as a result of the policies of advanced economies, limiting their ability to maneuver, the department said.
“This will weigh on the minds of monetary policymakers in emerging economies, India included,” the report said. The rupee dropped to a fresh record low of 85.2650 against the dollar on Thursday.