Will RBI Cut Interest Rates in December:Should the Reserve Bank of India (RBI) cut interest rates despite the rise in food inflation? Does the RBI need to understand that food inflation, i.e. the prices of food items, does not have the same direct relationship with interest rates as has been seen in its monetary policy so far? This question is because despite the increase in food inflation, this time Union Minister Piyush Goyal himself has recommended reduction in interest rates. Keep in mind that Piyush Goyal is the Cabinet Minister of the Economic Department like Commerce Ministry and is considered well-versed in economic matters. Therefore, his latest statement has suddenly intensified the debate whether RBI should reconsider its current strategy of focusing on food inflation while setting interest rates?
RBI should reduce interest rates: Piyush Goyal
Actually, this whole debate has started with the statement of Piyush Goyal, which he gave in a program of TV channel CNBC-TV18. Piyush Goyal said on Thursday, “I clearly believe that they (RBI) should cut interest rates.” He also said that the theory of considering food inflation while deciding on interest rates is absolutely flawed. However, Piyush Goyal has also made it clear that this is not the opinion of the government, but his personal views. But along with this, he also reminded the suggestion given in the Economic Survey presented in July this year, in which it was said that food inflation should not be included while targeting the inflation rate in India’s monetary policy framework. This is because the prices of food items are affected more by supply than demand. Along with this, Piyush Goyal has also expressed confidence that the inflation rate will come under control by December.
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Retail inflation rate was 6.2% in October
This statement of Piyush Goyal is important because according to recently released data, the country’s retail inflation rate has increased to 6.2% in October 2024, which is the highest level in the last 14 months. Earlier in September 2024, the retail inflation rate was 5.5%. According to these data released on Tuesday, the rise in the prices of fruits, vegetables and edible oils is the main reason for the rise in retail inflation. Due to this increase in retail inflation, the chances of RBI reducing interest rates in the coming few months have greatly reduced. Amidst fears of the economy slowing down, this is not being considered a good sign for economic growth.
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Target to keep retail inflation rate at 4%
The government has given a target for RBI to limit the retail inflation rate to 4%. A tolerance level of 2 percent above and below this has also been declared. That means it is important for RBI to keep inflation between 2 to 6 percent. According to this, the inflation rate for October is not only higher than the target but also higher than the tolerance level. Obviously, in such a situation, no cut in interest rates is expected during the next meeting of the Monetary Policy Committee (MPC) to be held in December. In a recent research paper of State Bank of India, it has been said that the chances of reducing interest rates even in the MPC meeting of February 2025 are very less. Rating agency CRISIL also believes that interest rates can be cut only in the last days of the current financial year.
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How much importance will RBI give to Piyush Goyal’s opinion?
RBI Governor Shaktikanta Das had recently said that reduction in interest rates can be considered only after the target of 4% in inflation rate is achieved. But when the RBI Governor said this, the latest statement of Commerce Minister Piyush Goyal had not yet come out. Piyush Goyal may have given the statement in his personal capacity about ignoring food inflation to cut interest rates, but the logic with which he has presented this argument has given a lot of weight to his statement. Now it remains to be seen whether Shaktikanta Das and his Monetary Policy Committee consider the weighty argument of a senior minister positively or not.
