To Cut Or Not? MPC To Weigh Cooling Inflation, Booming GDP — In This Economy

"The rupee is falling!," scream headlines as the Indian currency inches closer to 90 against the dollar. This morning it has touched an all-time low of 89.85, even as the central bank seems to intervening only selectively. It seems there is some dollar selling happening only at 89.80 levels. Why is this happening? It's a bit of a guessing game honestly. Some experts have five reasons, some have three and a few have only one. It could be the fact that foreign flows have turned tail, or that India's current account deficit was wider than expected, or that India is yet to sign a trade deal with the US even though everyone was pretty sure it was going to be done in November. To what degrees did these issues add to the pressure on rupee is difficult to ascertain. One thing is for certain though -- the year-end holiday just got a little more expensive.

"The rupee is falling!," scream headlines as the Indian currency inches closer to 90 against the dollar. This morning it has touched an all-time low of 89.85, even as the central bank seems to intervening only selectively. It seems there is some dollar selling happening only at 89.80 levels. Why is this happening? It's a bit of a guessing game honestly. Some experts have five reasons, some have three and a few have only one. It could be the fact that foreign flows have turned tail, or that India's current account deficit was wider than expected, or that India is yet to sign a trade deal with the US even though everyone was pretty sure it was going to be done in November. To what degrees did these issues add to the pressure on rupee is difficult to ascertain. One thing is for certain though -- the year-end holiday just got a little more expensive.

The monetary policy committee is set to start its three day meeting tomorrow, with a crucial decision on the cards. Should India's rate setting panel cut rates further, as retail inflation is widely expected to turn negative in the coming few readings? Or should it hold its fire and watch for further evolving data, even as GDP clocked in a surprising 8.2% growth rate for the July-September quarter? 

There's too many expert voices advocating for both sides and they all seem very sure. A Bloomberg poll of 36 economists shows that 24 are expecting a 25 bps cut, 11 expect a status quo policy, while one expects a 50 bps cut. 

I am neither an expert, nor sure of the MPC's decision making. All I can read is some data that is in front of us. The index of industrial production showed a 0.4% expansion in October, compared with an expectation of 4%. While one argument can be that there were fewer working days in October owing to the festive season, there is a clear slowdown in manufacturing and negative growth in consumer durables. 

The other important data point to consider is goods and services tax collection for November, which rose just 0.7% year-on-year. At Rs 1.7 lakh crore, monthly GST collections were the lowest in a while. The next big data point to watch is credit growth. In the month of October, non-food bank credit growth was at 11%, largely led by lower credit growth in agriculture, despite a 100 bps rate cut this year. There is also a marked slowdown in UPI transactions in November, as the festive rush peters down. 

So growth is looking a bit uncertain right now. Even if the headline GDP growth number was 8.2% in Jul-Sep, the potential GDP growth in the economy might be 7% or lower, according to Radhika Rao of DBS Bank. To that effect, a rate cut might be warranted. 

But more than that, Reserve Bank of India's guidance in its communication would be crucial. The central bank's estimates are at 6.8% for FY26, with growth slowing in the second half of the fiscal. Governor Sanjay Malhotra will need to tell everyone listening if the RBI is willing to tinker with its estimates one more time this year. And whether the repo rate is cut or not, is there room for more rate reductions going ahead?

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