Moody’s claims – RBI to keep interest rates stable this year

New Delhi| The Indian economy is in good shape, but the RBI may maintain a relatively tight monetary policy this year due to inflation risks. Moody’s Ratings said this on Friday, projecting 7.2 percent GDP growth for India in 2024.

Moody’s said that despite the rally in the near future, retail inflation will ease in line with the Reserve Bank’s target in the coming months, as food prices will come down due to higher sowing and adequate food grain buffer stock. Retail inflation hit a 14-month high of 6.21, surpassing the RBI’s upper tolerable limit, driven by a sharp surge in vegetable prices. The agency said sporadic pressure on food prices continues to lead to disinflation.

“The potential risks to inflation from rising geopolitical tensions and extreme weather conditions underline the RBI’s cautious stance towards policy easing”, Moody’s said. While the central bank neutralized its monetary policy stance in October, keeping the repo rate stable at 6.5 percent, it will maintain a relatively tight monetary policy next year, given the healthy growth dynamics and inflation risks.

RBI’s interest rate setting Monetary Policy Committee meeting is scheduled to be held next month, but with inflation at a high level, it is unlikely that RBI will cut benchmark interest rates. Domestic consumption is likely to increase, which will be boosted by increased spending and continued acceleration in rural demand during the current festive season, the US rating agency said in its Global Macro Outlook 2025-26.

Additionally, increasing capacity utilization, encouraging business sentiment and continued emphasis by the government on infrastructure expenditure will support private investment. India’s real GDP grew by 6.7 percent on a year-on-year basis in the second quarter of 2024, made possible by recovery in domestic consumption, strong investment and strong manufacturing activity. There are signs of stable economic momentum in the July-September quarter as well.

Moody’s said, “… From a macroeconomic perspective, the Indian economy is in a good position with a mix of solid growth and soft inflation. We forecast a 7.2 percent increase for calendar year 2024, followed by 6.6 percent in 2025 and 6.5 percent in 2026.

Strong economic fundamentals, including healthy corporate and bank balance sheets, strong external positions and adequate foreign exchange reserves, also bode well for the growth outlook, it said. Moody’s said the global economy has shown remarkable resilience in its comeback despite supply chain disruptions during the pandemic, the energy and food crises after the Russia-Ukraine war began, high inflation and the resulting tightening of monetary policy.

“Most G-20 economies will experience steady growth and continue to benefit from policy easing and ancillary commodity prices”, said Madhavi Bokil, senior vice president at Moody’s Ratings and author of the report. Post-election changes in U.S. domestic and international policies, however, could accelerate global economic fragmentation, further complicating ongoing stabilization

Moody’s said trade tensions and geopolitical tensions, particularly between the US and China, are primary risks to the global macroeconomic outlook. Potential long-term geo-economic fragmentation could complicate global trade and financial engagement. Moody’s said economies with strong domestic drivers of growth will experience greater resilience and stability.