Why Nirmala Sitharaman, Piyush Goyal would like RBI to slash interest rates

Two senior ministers of the Narendra Modi government have recently underlined the need to lower interest rates to spur growth, bringing into focus a matter that, in the past, sparked heated debates and even led to differences of opinion between the government of the day and the Reserve Bank of India (RBI).
Both Union finance minister Nirmala Sitharaman and Union commerce minister Piyush Goyal have flagged high interest rates as a dampener for growth, and want the RBI to change its tough stance on using high rates to tackle inflation.
“At a time when we want industries to ramp up and build capacities, our bank interest rates will have to be far more affordable,” Sitharaman said at a State Bank of India event in Mumbai on November 18.
Just days ago, on November 14, Goyal had said the central bank should cut interest rates. “It’s a flawed theory to consider food inflation for making a choice on cutting rates. This is my personal view and not that of the government,” he explained.
Maintaining price stability through its monetary policy is one of the core functions of the RBI. The bank keeps a tight leash on inflation using its quarterly monetary policies, and is slated to have the next meeting of its Monetary Policy Committee (MPC) in December. Most analysts expect the MPC to maintain a status quo on interest rates in that meeting so as to keep inflation in check.
In October, the RBI had maintained its benchmark interest rate, the repo rate, at which commercial banks borrow from the central bank, at 6.5 per cent for the 10th successive monetary policy review since April 2023. Five of the six MPC members approved a status quo on the rates in order to fight inflation, which had risen to 5.49 per cent in September from 3.65 per cent in August.
RBI governor Shaktikanta Das had said after the MPC meeting that any rate cut in the immediate future was ruled out since retail inflation was expected to rise in October as well. And it did.
Consumer Price Inflation (CPI) rose to a 14-month high of 6.2 per cent in October, breaching the RBI’s target range of 2-6 per cent, driven by high food inflation. Food and beverages inflation stood at 9.7 per cent in October, in which the inflation on vegetables alone was over 42.2 per cent, a 57-month high. Food inflation was 8.4 per cent in September. Seven of the 12 food groups saw an upward tick in inflation. The inflation in pulses came in at 7.43 per cent, oil and fats at 9.5 per cent and cereals at 6.9 per cent.
With high prices of goods on the one side and stagnant incomes on the other, the Indian middle class is finding the going tough and is increasingly tightening its belts. Slowing urban spending over the past three to four months has not only hurt the earnings of the largest consumer goods firms but has also raised questions about the structural nature of India’s long-term economic success, said a recent Reuters report.
Since the end of the Covid pandemic, India’s economic growth has been driven in large part by urban consumption; however, that now seems to be changing.
Added to the high inflation is the issue of unemployment and under-employment in some cases, which has left little disposable income in the hands of the middle class. This is indeed why the Modi government would like the RBI to look at alternative ways to rein in inflation.
The US Federal Reserve had cut interest rates twice in recent months, first by 50 basis points in September, followed by 25 basis points in early November, in a bid to boost growth and employment opportunities in the United States.
Several fast-moving consumer goods (FMCG) companies like Nestle, Tata Consumer Products, Pidilite and Hindustan Unilever had highlighted the weakening of demand in India’s urban areas, from where they reportedly derive two-thirds of their revenue and a third of their volumes. Urban consumers have been impacted by the rising prices, excessive rains this year and slow growth in salaries.
Hindustan Unilever, for instance, reported a 4 per cent drop in its standalone net profit to Rs 2,612 crore for the second quarter of the fiscal due to higher expenses amid a slowdown in the urban markets, compared to Rs 2,717 crore in the corresponding period last year.
Dabur India’s net profit for the same period fell 17 per cent to Rs 425 crore, pointing to lower consumption in the urban areas. However, boosting consumption will be a challenge if interest rates continue to be high, and the Centre would be none too glad to see any lowering of rates.
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