RBI monetary policy: The Reserve Bank of India in its monetary policy has raised the GDP growth forecast for the current financial year 2023-24 to 7% as against 6.5% earlier. The change in forecast comes days after the GDP growth for the July-September quarter came in much better than expected levels of 7.6%. RBI expects the Indian economy to clock growth rates of 6.5% and 6% in the third and fourth quarter of FY24 respectively.
RBI governor Shaktikanta Das has said that India is better placed to withstand the uncertainties compared to many other countries. The Monetary Policy Committee kept the key repo rate unchanged for the 5th time to 6.5%. The repo rate has been raised by 250 basis points since May last year. We take a look at some of the key economy, GDP, inflation and global economy related takeaways from the central bank governor’s statement:
RBI Monetary Policy: Key Takeaways
1. Amidst a globally unsettled economic environment, the Indian economy stands resilient and dynamic. Q2’s real GDP growth surpassed expectations, reflecting the robust fundamentals of India’s economy. Banks and corporates show stronger balance sheets, fiscal consolidation progresses, and forex reserves offer a buffer against external shocks.
2. The global economy remains delicate, marked by a slowdown in world trade amidst increasing global protectionist measures. Despite considerable efforts to restore global supply chains, factors such as high debt levels, ongoing geopolitical tensions, and severe weather conditions amplify the risks to both global growth and the inflation landscape. Declining inflation in advanced economies has raised prospects for an earlier conclusion to the tightening of monetary policies, boosting market confidence. Sovereign bond yields are easing as markets do not anticipate additional rate hikes in the near term.
3. Headline inflation has notably eased to 4.9% in October from 7.4% in July, observed across all components of the Consumer Price Index (CPI) – food, fuel, and core (excluding food and fuel). Core inflation’s broad-based reduction indicates the success of monetary policy in driving disinflation. However, the near-term outlook carries some uncertainty due to potential food inflation risks in November and December.
4. To ensure effective inflation control and sustained growth, the monetary policy must remain disinflationary. The gradual withdrawal of accommodation aims to align inflation progressively with the target, while still supporting growth.
5. In the future, private consumption is anticipated to receive backing from incremental rural demand, a bolstered manufacturing sector, and sustained vigor in services. Healthy financial standings of both banks and corporations, along with elevated capacity utilization, ongoing business confidence, and the government’s emphasis on infrastructure expenditure, are likely to drive private sector capital expenditure. The downward pressure from external demand is predicted to ease, partly due to a potential upturn in both merchandise and services exports. Nevertheless, persistent geopolitical unrest, volatility in worldwide financial markets, and escalating geo-economic disparities pose risks to this outlook.
6. Projections suggest real GDP growth at 7.0% for 2023-24, with risks balanced evenly. “Real GDP growth for 2023-24 is projected at 7.0 per cent with Q3 at 6.5 per cent; and Q4 at 6.0 per cent. Real GDP growth for Q1:2024- 25 is projected at 6.7 per cent; Q2 at 6.5 per cent; and Q3 at 6.4 per cent,” the statement said.
7. Food prices will significantly shape the inflation outlook. Indicators point to potential price increases in key vegetables, likely influencing near-term CPI inflation. Monitoring ongoing sowing progress for crops like wheat, spices, and pulses is crucial. High global sugar prices also pose concerns. CPI inflation is anticipated at 5.4% for 2023-24, with risks evenly balanced across quarters. “CPI inflation is projected at 5.4 per cent for 2023-24, with Q3 at 5.6 per cent and Q4 at 5.2 per cent. CPI inflation for Q1:2024-25 is projected at 5.2 per cent; Q2 at 4.0 per cent; and Q3 at 4.7 per cent. The risks are evenly balanced,” the statement said.
8. Vigilance over food inflation remains critical. Sudden vegetable price fluctuations might affect headline inflation in November and December. While isolated shocks might be overlooked, monitoring and addressing risks of widespread shocks that disrupt disinflation efforts is necessary.
