Is nobody happy with RBI?

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In today’s edition of The Daily Brief:

• RBI's balancing act
• China's steel flood

RBI's balancing act

The Reserve Bank of India (RBI) just wrapped up its latest Monetary Policy Committee (MPC) meeting, and here’s what came out of it:

• The repo rate, the interest rate at which the RBI lends money to commercial banks, stays at 6.5%.
• The stance? Neutral—meaning no plans to raise or lower rates for now.
• The Cash Reserve Ratio (CRR), the portion of money banks must keep with the RBI, has been reduced by 0.5%. This move adds ₹1.16 lakh crore to the system.

But what do these numbers really mean? Let’s break it down by asking some big questions—and then trying to answer them.

Growth: Why is it slowing? What can we do to bring it back up? And why didn’t the RBI cut rates to help?

Inflation: Why did it spike? Will it come down soon, or are we stuck with high prices?

CRR vs. Rate Cut: What’s the difference, and why did the RBI choose a CRR cut instead of reducing rates?

Let’s set the stage: everything we’re talking about here comes down to one goal—balancing growth and inflation. It’s a delicate act, like walking a tightrope, and one wrong step could throw the economy off balance.

What’s Happening with Growth?

India’s economy grew by 5.4% in the second quarter of FY2024-25, which is slower than expected. So, what’s holding us back?

Source: RBI

• Demand is low: People are spending less, and businesses are hesitant to invest. This has slowed down key sectors like retail and services.
• Supply isn’t keeping up: Industries like manufacturing, mining, and electricity are struggling because of low demand and supply chain issues.
• Global challenges: A strong US dollar, trade tensions, and geopolitical uncertainties have made things harder for India’s economy.

However, it’s not all bad news. RBI Governor Shaktikanta Das highlighted signs of improvement: better kharif crop output, strong rabi prospects, increased government spending on infrastructure, and a resilient services sector. Growth is expected to pick up to 6.8% in Q3 and 7.2% in Q4 of this fiscal year.

So, while growth is definitely a concern, it’s not at crisis levels. That’s why the RBI didn’t cut interest rates to boost it.

What About Inflation?

Inflation jumped to 6.2% in October, going beyond the RBI’s comfort zone of 4% (+/- 2%). The main reason? Food prices shot up because of unseasonal rains, supply chain problems, and global price swings in key commodities.

Source: RBI

But there’s some good news: inflation is expected to ease to 4.5% by the last quarter of FY2024-25. This is thanks to a strong rabi harvest and a seasonal drop in vegetable prices.

The RBI isn’t panicking yet. They’re keeping a close eye on the situation, especially since high food prices haven’t affected core inflation areas like housing or services. Still, if inflation doesn’t cool down as expected, they’re ready to take action.

So, here we are: growth concerns on one side, inflation worries on the other. The RBI’s decisions aren’t random—they’re carefully planned to balance these two competing forces. And that’s where the tricky tradeoff between inflation and growth comes in.

Let’s break it down.

Option 1: Lowering Repo Rates

Cutting repo rates is usually the first move when you want to boost growth. Why? It makes loans cheaper for businesses and consumers, encouraging them to invest, spend, and drive the economy forward. But there’s a downside: if demand goes up without a matching increase in supply, prices can shoot up fast.

In October 2024, inflation had already spiked to 6.2%, well above the RBI’s comfort zone. Adding more demand at a time when food prices were soaring could’ve made things worse.

Option 2: Maintaining Repo Rates

By keeping the repo rate steady, the RBI played a safe role in controlling inflation. Stable borrowing costs help prevent demand from growing too fast and keep inflation expectations within the 4% ±2% target range.

But there’s a tradeoff. Higher borrowing costs can make businesses hesitant to expand, and consumers might delay big purchases. With private consumption already weak, this isn’t exactly a quick fix for the economy.

Option 3: Cutting CRR

Here’s where the RBI got creative. Instead of lowering rates, they cut the Cash Reserve Ratio (CRR) by 50 basis points. This freed up ₹1.16 lakh crore for banks to lend, putting more money into the system.

While this sounds good in theory, some experts like Deepak Shenoy have a different view. He argues that banks already have plenty of liquidity, so the immediate impact might be limited. However, if the RBI needs to sell more dollars aggressively and pull rupee liquidity out, this move could help in the long run.

So, Why No Rate Cut?

Here’s how the RBI sees it: growth recovery is already on the way, thanks to strong farm output, government infrastructure projects, and a solid services sector. Cutting rates now could overstimulate demand, which would be like pouring fuel on a fire that’s already burning hot.

Instead, the RBI has taken a balanced approach. They’re supporting growth while keeping inflation from spinning out of control—a careful move in a tricky situation.

What’s the Key Takeaway from This MPC Meet?

The RBI’s policy is like a game of chess—every move impacts the next, and staying flexible is essential.

As a developing country, India can’t afford to put all its eggs in one basket. Unlike developed nations that can print money or run deficits without much worry, we need to keep room for unexpected shocks—whether they come from within the country or abroad.

That’s why the RBI decided to keep rates steady but cut the CRR. It’s a smart middle-ground approach to maintaining balance.

Were they right? Honestly, we won’t know until a few months from now when we can look back. But here’s the thing: their job is to make tough decisions, and our job is to explain those decisions in a way that makes sense (and hopefully doesn’t put you to sleep).

Until the next policy review, we’ll keep watching growth, inflation, and liquidity—while the RBI keeps walking that tightrope. Because let’s be real: balancing an economy isn’t easy.

China's steel flood

Imagine you’re a food vendor at a busy street market. You’ve worked hard for years—perfecting your recipes, sourcing the best ingredients, and earning your customers’ trust. But one day, a massive food truck parks right next to your stall and starts selling the same dishes for half the price. The catch? They’re using cheaper ingredients and selling at a loss just to lure customers. You try to keep up, but it’s a losing game, and soon your business starts to suffer.

That’s exactly what’s happening in the steel market. China is flooding global markets with cheap steel, making it almost impossible for countries like India to compete fairly.

China is the world’s largest steel producer, churning out over 1 billion tonnes of steel every year—more than half the world’s total steel production. To put that in perspective, India, the second-largest producer, makes only about 125 million tonnes.

Here’s the issue: China doesn’t actually need all that steel. Its economy is slowing down, and domestic demand isn’t as strong as it used to be. Instead of shutting down its steel mills, China is dumping cheap steel in global markets, including India. And just like the food truck, this practice is hurting local players who can’t match those artificially low prices.

This isn’t just any steel—it’s being sold at rock-bottom prices, sometimes even below the cost of production. For China, this strategy keeps its steel mills running and its workers employed. But for countries like India, it’s a huge problem. Local producers now have to compete with these ridiculously cheap imports.

In 2023, China exported around 90 million tonnes of steel—a massive 35% increase from the year before. Meanwhile, Indian steel companies like Tata Steel and JSW Steel have spent billions to create high-quality products. But with cheap Chinese steel flooding the market, they’re struggling to compete. They either have to cut their prices and take a hit or risk losing market share.

Look at the U.S. for comparison. To protect its own steelmakers, the U.S. slapped heavy tariffs on Chinese steel years ago. But China found a way around it. Instead of exporting directly, it started sending steel to countries like Vietnam, which then re-exported it to the U.S. under the radar. This clever workaround lets China dodge tariffs while still flooding the market with cheap steel.

Source: Bloomberg

In Asia, a large chunk of China’s steel ends up in countries like Vietnam, South Korea, and the Philippines. But India has become one of the biggest dumping grounds, partly because of Free Trade Agreements (FTAs) with countries like Vietnam and South Korea. These agreements allow steel to come in with little to no tariffs, making it even harder for Indian companies to compete.

India’s finished steel imports from China hit a record high in the first seven months of this financial year (April-October). During this period, China shipped 1.7 million metric tons of finished steel to India—a 35.4% increase compared to last year.

Sajjan Jindal, the chairman of JSW Steel, has openly criticized this trend. He says China is using the FTA route to flood the Indian market with cheap steel, which is hurting local steelmakers. Tata Steel’s CEO has echoed similar concerns, warning that if this continues, Indian steel companies might hesitate to invest in the future. After all, why would anyone pour money into expanding production when the market is flooded with low-cost imports?

The government is aware of the issue. In response, India’s steel ministry has suggested imposing a 25% safeguard duty on steel imports to protect local producers. However, this proposal is still under consideration and hasn’t been finalized yet.

The proposal was discussed during a meeting on December 2 between Union Steel Minister H.D. Kumaraswamy and Commerce and Industry Minister Piyush Goyal. The focus was on addressing the rising steel imports into India, especially from Free Trade Agreement (FTA) countries.

“With both industries—steel and metallurgical coke—playing a key role in India’s growth, we discussed ways to boost production, improve quality, and strengthen global competitiveness,” Goyal shared in a post on X (formerly Twitter).

Kumaraswamy added that the two ministries explored ways to collaborate and make it easier for domestic players to do business.

Source: Trading Economics

This is a big issue because steel is the backbone of many industries—construction, infrastructure, automobiles, and even consumer goods. India’s steel industry is huge. It contributes about 2% to the country’s GDP and provides jobs to millions of people, both directly and indirectly.

If Indian steelmakers can’t compete with cheap imports, it could slow down infrastructure projects, lead to job losses, and hurt future growth. In fact, Tata Steel and JSW Steel have warned that without a fair playing field, investments in new projects might come to a standstill. This wouldn’t just hurt steel companies—it would have a ripple effect on the entire economy.

Source: IBEF

And it’s not just businesses that will feel the impact—everyday people like us will too. At first, cheaper steel imports might seem like a good thing, potentially lowering the prices of things we buy, like cars and home appliances. But there’s a hidden cost.

If Indian steelmakers struggle or shut down, we could end up relying on imports for our steel. And when we depend on other countries for something as essential as steel, we’re at risk of facing price hikes and supply chain disruptions in the future.

Tidbits

1. Sebi proposes a 15-minute Call Auction Session to replace the volume-weighted average price for closing stock prices. This move aims to reduce tracking errors for index funds and improve market efficiency, aligning with global practices.
2. India’s wedding industry is set to hit ₹6 trillion in 2024, driven by rising costs and millennial spending. With 42% self-funding weddings and loans growing 20%, millennials are reshaping the sector while fueling demand across jewelry, hospitality, and fashion.
3. Russia has invested $20 billion in India, with a focus on energy and manufacturing. Bilateral trade, driven by discounted oil imports, reached $65 billion in 2023, as both nations aim to deepen ties and achieve $100 billion in trade by 2030.
4. NHAI’s ₹1,000 crore green bond issue will fund eco-friendly initiatives on the Delhi-Mumbai Expressway, including renewable energy and rainwater harvesting. This marks a first for India’s highway sector in green financing, boosting ESG-focused investments.

Thank you for reading. Do share this with your friends and make them as smart as you are 😉 Join the discussion on today’s edition here.

This post was first published on Substack.