RBI policies may be behind demand slowdown, FinMin says

A combination of monetary policy stance and macroprudential measures by the Reserve Bank of India (RBI) may have contributed to the slowdown in demand in the April-September period, the finance ministry said in its latest monthly economic review for November, even as it lauded RBI’s liquidity easing measures in its policy meeting earlier this month.

“It is good news that the central bank lowered the cash reserve ratio—the share of deposits that banks must keep with RBI—from 4.5% to 4% in its policy meeting. That should help boost credit growth, which has slowed a little too much and quickly in FY25,” the finance ministry said.

The cash reserve ratio was last pared in 2020, and the latest cut is likely to infuse liquidity of about Rs1.16 trillion (about $14 billion) into the banking system, former RBI governor Shaktikanta Das had said.

India had grown at a lacklustre 5.4% in the second quarter (July-to September) of the fiscal. The finance ministry’s report is the first such official statement that partly puts the blame on RBI for the economic slowdown, especially after finance minister Nirmala Sitharaman and commerce minister Piyush Goyal urged the central bank to cut interest rates.

The RBI has held its policy repo rate steady at 6.5% since last February, citing significant risks to the inflation outlook.

Last month, Sitharaman said the current borrowing costs as “very stressful” for industries that are looking to expand capacities.

With the appointment of Sanjay Malhotra as the new RBI governor, it remains to seen whether the central bank will cut rates in February, given the mix of domestic and global challenges.

The finance ministry said it remained optimistic about a stronger performance in the second half of FY25, estimating growth for the current fiscal year at 6.5%, driven by better performance in farming and industry.

Rural demand remains strong, helped by higher crop support prices, full reservoirs, and enough fertilizer supply. Urban demand, though weak earlier, is also improving with car sales rising 13.4% in October-November and more people traveling by air, the government said.

Sectors such as cement, iron, steel, mining, and electricity are likely to benefit from increased government capital expenditure and the end of the monsoon season, providing further support to industrial activity.

The ministry maintained that global challenges remained a concern.

The report said risks like unpredictable trade growth, high stock markets, and pressure on currencies due to a strong US dollar have also led to the slowdown. These issues could make monetary policy decisions more difficult in India and other countries.

The finance ministry also noted improvements in the services sector, with signs of growth in October and November.