It’s the economy, stupid! To cut or not to cut

June 12, 2024

We love IndiaDataHub’s weekly newsletter, ‘This Week in Data’, which neatly wraps up all major macro data stories for the week. We love it so much, in fact, that we’ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don’t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to IndiaDataHub. All mistakes, of course, are our own. 


  • The RBI has kept its repo rate at 6.5% for the 8th time in a row. But some dissenting voices are emerging within the MPC
  • Central banks from various developed markets have started cutting their policy rates. The United States, however, is keeping firm – perhaps due to a robust labour market.
  • High frequency data from May has been dismal. Automobiles have stagnated, GST collections have grown at a 4-month low, petroleum consumption is down, and toll collections are decelerating.
  • What do the Lok Sabha results mean for policy-making? Wait and watch, says IndiaDataHub.

Sixteen months of status quo

The RBI’s Monetary Policy Committee (MPC) met last week to look at the repo rate, among other things. We’ve written about the ‘repo rate’ is before, but here’s a quick recap: fundamentally, the repo rate decides how expensive money is for banks. This is a delicate matter. The cheaper money is for banks, the more they can lend it out to everyone else — and when there’s too much money in people’s hands, everything becomes expensive.

The MPC has kept this rate at 6.5% — a relatively high figure — since February last year. Last week, it voted to keep it there for the eighth time in a row. 

But let’s step behind the scenes. The MPC has six members: three from the RBI, and three from outside. Till December last year, all six thought it best that things were left unchanged. Then, in February, Prof. Jayanth Varma — one of its external members — started voting for a rate cut.

This time around, Dr. Ashima Goyal — another external voice — has asked for a cut as well, alongside Prof. Varma. Of course, the majority still wanted status quo, and that’s the way the committee has gone. For now. 

Who knows what happens the next time around, though? In case another member flips, there’ll be a tie. The RBI Governor will have the casting vote, and can resolve the tie as he prefers. If two members flip, however, a rate cut will pass with the majority vote. 

That said, as things stand, a flip is unlikely in the near future. For one, the high repo rate doesn’t seem to have affected the economy much, so there’s no tearing hurry to change things. If anything, the MPC is more optimistic about the economy than it was two months ago, upgrading its FY 2025 growth estimate to 7.2%, from April’s 7%. Moreover, India’s food inflation refuses to go down, making it hard for the RBI to perform its job of bringing prices under control. One of these has to change before a rate cut is likely. 

Rates around the world

Of course, RBI isn’t the only central bank that’s thinking about rates. 

Three central banks from developed markets have cut rates this year. The Swiss Central Bank cut rates by 0.25% back in March. Then, last week, both the Bank of Canada and the European Central bank had their own 0.25% cuts, down to 4.75% and 4.25% respectively. 

On the other hand, the United States has neither cut rates, nor is it likely to do so. The markets think there’s more than a 90% chance that rates remain where they are in July. They’re only giving the Fed a 50:50 chance that they go down by September. 

Like the RBI, the US Fed is probably taking heart from its economy to maintain the status quo. Despite higher-than-usual rates, America’s job market is remarkably stable. In fact, it just threw up a pleasant surprise last month, as the country’s workers added 272,000 new jobs in May — well over the expected 182,000. 

An unremarkable month

We have new high frequency data for May. The verdict: this has been a bang average month for India. 

Let’s start with automobiles. A vehicle is a big purchase, and people only buy one when they feel confident about how they’re doing. Which is why it’s worrying that people haven’t been too keen on buying one last month. Cars and tractor sales declined slightly in the month, compared to May last year, while two-wheelers only saw a modest 2% growth rate. 

GST data also shows something similar. The government’s GST collections grew at 11% compared to May last year. This is in the double-digits, yes, but it’s a four-month low. Since GST collections are a function of the total business happening in the country, this possibly tells us that India’s business activity is decelerating. 

People consumed 1% less petroleum products than they did last May. The last time it fell was in November, but only because that’s when we celebrated Diwali, when many truckers take a break. Leaving Diwali aside, however, the last time our petroleum consumption fell was in January 2022 — right in the middle of the COVID-19 pandemic. 

There’s a slight silver lining: power generation was up by 14% year-on-year, last month. Then again, that might be because this May was the hottest May in recorded history

Toll collections, which tell us about the number of vehicles on Indian roads, tell a dismal story as well. In May, they grew by a meagre 3.6% year-on-year — dropping from 7.5% in April and 10% in March. 

So then, why has the Indian economy performed so poorly in May? Could it be that the elections played havoc with the economy? Was it simply too hot to work? If this is a temporary, one-off thing, we’ll find out soon enough. 

If it isn’t, though, we may be staring at a shift in the economic cycle. 

What happens now the elections are done?

Nobody expected the elections to go the way they did. But one way or the other, they’re done. What happens now? 

The easy answer is that the government will have to take populist measures, and structural reforms like disinvestment may slow down —- after all, it needs to make sure everyone stays happy. To IndiaDataHub, though, that’s a simplistic hot-take. After all, if there’s something this election has taught us, it’s that one should be humble while trying to predict the direction national politics shall take.

We don’t yet know how the BJP itself interprets the seats it has lost. We’ll have a better sense of that in the revised budget it will present in July. That’ll set the tone for what is to come through this Lok Sabha term. We’ll be watching. 

That’s all for the week, folks. Thanks for reading!

Senior writer at Zerodha

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