The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday unanimously decided to keep key interest rates unchanged, raised its GDP growth projection for 2023-24 to 7% from 6.5%, and retained its average inflation forecast at 5.4%, while warning that inflation could spike through November and December.
“We have made significant progress in bringing inflation below 5% despite intermittent blips… The target of 4% inflation is yet to be reached and we have to stay the course. Headline inflation remains volatile due to supply shocks,” Reserve Bank of India (RBI) Governor Shaktikanta Das said.
While food inflation has moderated from the double-digit levels of July to 6.2% in October, the Governor said the inflation outlook would be considerably influenced by uncertain food prices. “While monetary policy may look through one-off shocks, it has to keep an eye on ensuring food inflation spikes don’t become generalised,” Mr. Das said.
Rate cut hopes
Five of the six MPC members voted to persist with a policy stance focus on “withdrawal of accommodation”, but there was no indication of when interest rates — the key repo rate has been paused over five successive reviews after being raised by 250 basis points to 6.5% — may be trimmed. One basis point is equal to 0.01 percentage point.
Governor Das stressed that the idea was not just to achieve 4% inflation but to maintain it at that level on a durable basis and it is not possible to provide a “forward guidance” in the current scenario when there is excessive uncertainty. The “future looks fickle and new shocks can hit any economy at any time”.
“We expect the Central bank to maintain a prolonged pause on monetary policy rate until August 2024 and opt for a pivot thereafter with visibility on the durability of the 4% inflation target getting better,” QuantEco Research said in a note on Friday’s monetary policy statement.
“An increase in some vegetable prices may push consumer price index [CPI] inflation higher in coming months. The crop output of cereals and pulses needs to be monitored and elevated sugar prices in the world are also a matter of concern,” he stressed, noting that retail inflation may surge in November and December from the four-month low of 4.87% recorded in October.
The RBI expects inflation to average 5.6% in the current quarter, signalling that the pace of price rise over last month and this month may be close to 6%, its upper tolerance limit for inflation. For the January to March 2024 period, inflation is expected to average 5.2%.
“Moving forward, inflation management cannot be on Autopilot. The future path is expected to be clouded by uncertain food prices. CPI inflation for November is expected to be high,” Mr. Das said.
Upgrading its growth forecast, the MPC reckoned that the real GDP growth for 2023-24 would be 7%, with the third quarter clocking 6.5% growth and the fourth quarter 6%. The upward revision was prompted by the second quarter real GDP uptick of 7.6% which the Governor noted had surpassed all expectations, including its own forecast of 6.5%.
It also projected growth and inflation numbers for the first three quarters of 2024-25. “Real GDP for the Q1 of 2024-25 is projected at 6.7%, Q2 at 6.5% and Q3 at 6.5%, with risks evenly balanced… On the assumption of normal monsoons, Consumer Price inflation is projected at 5.4% for this year… Q1 of 2024-25 is projected at 5.2%, Q2 at 4% and Q3 at 4.7%. The risks are evenly balanced,” Mr. Das said.
The Central bank chief asserted that amid a global economy clouded by uncertainties, India remains better placed to withstand their impact than its emerging economy peers and monetary policy actions and communication can be a stabilising force to anchor expectations in times of such high volatility as has been witnessed through the last two years.
“As India treads the path to a brighter future, I recall the wise words of Mahatma Gandhi: ‘Progress is absolutely assured whenever there is an unalterable determination’,” the Governor said in conclusion, noting that there are congenial conditions in place for sustained growth of the Indian economy.