In 2022, when retail inflation surged to a high of 7.4%, the Reserve Bank of India (RBI) faced a dual challenge—curbing rising prices and sustaining economic growth. To tackle this, the RBI adopted an aggressive monetary policy and raised the repo rate from 4% to 6.5% between May 2022 and February 2023. With falling global commodity prices and improved supply chains, inflation came down to 4.1% by early 2024—within the target range of 4% ± 2%. This marked a major achievement for the RBI. However, a new challenge has emerged in the form of slowing economic activity.

While the decline in inflation has provided some relief to consumer spending, high interest rates have put pressure on borrowing and investment. In the last two quarters of 2023, demand for housing and vehicle loans declined by 8–10%. The MSME sector also saw a dip in production due to the lack of affordable credit. The construction sector, a major source of employment and growth, slowed down in the second half of 2023. Additionally, the global economic environment remains complex. Due to the US Federal Reserve’s tight monetary stance, emerging markets witnessed capital outflows. In March 2024, India recorded a net capital outflow of $2.4 billion (as per RBI data).

Domestically, pressure from rising food prices is resurfacing. The impact of El Niño on the 2024 monsoon has affected agricultural production. Prices of onions (up 20%), tomatoes (up 15%), and pulses (up 12%) have risen. The government has taken steps such as export restrictions and buffer stock management, but this trend could push inflation back above 5%. As a result, the RBI remains cautious about rate cuts.

The question now is—should the RBI opt for an immediate and large rate cut? Experts, including ICRA and SBI Research, believe aggressive easing would be risky given persistent inflationary threats and global instability. A better strategy would be gradual cuts of 25 basis points each quarter. This would support demand without putting undue pressure on prices.

Additionally, the government must address supply-side bottlenecks. Improvements in agricultural storage, transport, and distribution can help stabilize food prices. Targeted low-interest loan schemes for MSMEs could help revive the investment cycle.

So far, the RBI’s performance has been balanced. But the road ahead is challenging. If monetary policy and government reforms work in tandem, India’s economy can continue to grow while staying protected from inflation. Otherwise, the country risks facing either uncontrolled prices or stalled growth.

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