Liquidity Support Is Priority; Rate Cut A Close Call

The MPC's action and commentary in this meeting will serve as a reference point

- Siddhartha Sanyal

The backdrop of the monetary policy committee (MPC) meeting later this week is a complex one. Growth momentum has slowed in 2024-25. Headline retail inflation is still high despite softening from the recent peak. The government maintained strong fiscal discipline, despite offering tax concessions towards boosting private consumption, reflecting a decelerating expenditure budget. Importantly, this comes against a global environment of pressure on most emerging market (EM) currencies amid geopolitical volatility, US exceptionalism and a raging dollar. US Fed has paused after three consecutive rate cuts, while ECB and central banks in England and Canada continue cutting. Among EMs, Indonesia recently cut rates to aid growth, despite a weakening Rupiah.

Back home, headline CPI averaged 5.6% during Q3 2024-25, but largely due to items beyond the influence of monetary policy (e.g., vegetables, precious metals). However, nearly all other important inflation indicators such as WPI, core-WPI, core-CPI and GDP deflators stayed discernably soft (averaged between 1% and 3.5%) during 2024-25. Thus, headline CPI inflation is elevated reflecting prices of only a handful of non-core items, while other inflation indicators are distinctly subdued.