The state of the economy, as RBI would have seen it | Number Theory

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The Monetary Policy Committee (MPC) of RBI decided to maintain the status quo in its October meeting. Repo rate – the interest rate at which RBI lends money to banks – remains unchanged at 5.5%. Monetary policy stance continues to be neutral, which would suggest no urgency to bring down interest rates. And yet, the policy communication from the central bank has dropped enough hints about a rate cut in the December meeting. Growth continues to be “below aspirations” and “current macroeconomic conditions and the outlook has opened up policy space for further supporting growth”, Governor Sanjay Malhotra said after the MPC meeting. These statements have come despite the fact that the MPC has raised its full year (2025-26) growth projection from 6.5% to 6.8% between its August and October projections. How does one reconcile these seemingly contradictory hints in the MPC resolution? Here are four charts which answer these questions.

Representational image. (Mint)

The state of the economy, as RBI would have seen it

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  Growth momentum through the fiscal year has changed from August

  MPC’s August resolution projected a growth rate of 6.5% for 2025-26. The quarterly growth numbers suggested a broadly similar quarterly growth momentum across the year: 6.5%, 6.7%, 6.6% and 6.3% in the quarters ending June 2025, September 2025, December 2025 and March 2026. GDP growth for the June quarter which was released on 29 August – it was 7.8% instead of 6.5% – sprang a huge positive surprise on both RBI and independent analysts. RBI has now made an upward revision to its September quarter growth forecast as well, from 6.7% in its August projection to 7% now. However, the growth outlook for the second half of the fiscal year has been brought down with downward revisions of 20 and 10 basis points. One basis point is one hundredth of a percentage point.
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  At least some of the growth surprise in H1:2025-26 is likely on account of indexation issues

  MPC’s June 2025 resolution projected retail inflation, as measured by Consumer Price Index (CPI) for the quarter ending June 2025 at 2.9%. The actual number came in at 2.7%. Wholesale inflation as measured by Wholesale Price Index (WPI) came in at just 0.3% in the June quarter. The MPC does not make projections for WPI. A lower inflation can boost real GDP growth for a similar level of nominal growth by reducing the deflator. A comparison of historical values of difference between nominal and real GDP growth and CPI and WPI shows that it is positively correlated with both inflation measures and has a stronger correlation with WPI. This means that some of the real GDP bump in the first half of the year could be on account of lower inflation than a stronger than expected economic momentum. To be sure, there is nothing sinister about these numbers. It is just a statistical boost.
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  Consumer sentiment has been broadly stable in the last few rounds

  RBI also releases the results of its forward-looking surveys along with the MPC resolution. The Consumer Confidence Survey – there are now both rural and urban versions of it – was among the most interesting to track in this cohort because of the GST reforms – this has led to reduction in GST rates on a large number of commodities – announced in early September and effective since 22 September. A big jump in consumer confidence numbers because of the GST reduction would have suggested that the economy could experience significant tailwinds from the policy. The numbers from the latest round of Consumer Confidence Surveys offers inconclusive evidence on this count. This is because both the rural and urban CCS were started on 28 August, before the GST council made its decision and they ended on September 7 and 6 respectively, before the lower rates came into effect. One would have to wait for the November round of CCS data to see whether consumer sentiment shows a discernible jump because of the GST cuts.
• What we understand...

  Given the fact that RBI has actually lowered its growth forecast for the December quarter, it is unlikely that it is expecting a significant boost from the consumption side. To be sure, what is also likely is that some of the consumption boost has been neutralised by the adverse effect of US tariffs and things would have been much worse without this boost. This is the biggest reason why the MPC has decided to adopt a wait and watch mode right now and dropped enough hints about a rate cut in December.