RBI Monetary Policy Update:
Led by RBI Governor Shaktikanta Das, the Monetary Policy Committee (MPC) chose to maintain the key repo rate at 6.5%, aligning with expectations. Shaktikanta Das provided insights, forecasting a GDP growth of 7% for FY 2024-25 and projecting CPI inflation at 4.5%, with risks evenly balanced. Das metaphorically remarked that the “elephant in the room,” inflation, has now “left the room” and is heading towards the forest.
This marked the inaugural RBI MPC meeting for the new fiscal year, occurring amidst global economic uncertainties, and with the US Federal Reserve yet to commence its rate cut cycle. Economists and analysts anticipated the RBI’s decision to retain the repo rate unchanged, especially given India’s stronger-than-anticipated GDP growth of 8.4% in the third quarter. Although CPI inflation has finally moderated within the RBI’s comfort zone of 2-6%, it remains at an elevated level.
RBI Monetary Policy Live
Traditionally, the Reserve Bank of India and the Monetary Policy Committee convene once every two months to deliberate on the key repo rate, which plays a pivotal role as it determines the rate at which the central bank lends to commercial banks. This rate significantly influences liquidity within the financial system. A higher repo rate implies increased borrowing costs for banks from the RBI, thereby maintaining higher loan rates, consequently making borrowing more expensive for individuals. Conversely, a lower repo rate grants banks easier access to capital, leading to reduced lending rates and making loans more affordable.
RBI Monetary Policy Live
Assessment of Growth and Inflation
Global Growth
6. The global economy has remained resilient with a stable outlook as reflected in various high frequency indicators.4 Global trade is expected to grow faster in 2024, although weaker than its historical average.5 Inflation is moving closer to targets, but the last mile of disinflation is turning out to be challenging. Services inflation in advanced economies remains sticky amidst tight labour markets.
Accordingly, central banks are cautious in their communications, thereby tempering market expectations about the timing and magnitude of interest rate cuts later during this year. Equity markets have gained while bond yields and US dollar have remained volatile. The overall outlook is challenged by continuing geopolitical conflicts, disruptions in trade routes and high public debt burden.
Domestic Growth
8. Domestic economic activity continues to expand at an accelerated pace, supported by fixed investment and improving global environment. The second advance estimates (SAE) placed real GDP growth at 7.6 per cent for 2023-24, the third successive year of 7 per cent or higher growth.
9. From the supply side, industrial activity led by manufacturing continued its momentum. The purchasing managers’ index (PMI) for manufacturing displayed a sustained expansion in February-March, touching a 16-year high in March. Services sector exhibited broad based buoyancy with all sectors registering strong growth. The PMI services remained above 60 during February-March, suggesting sustained healthy expansion.
RBI Monetary Policy Live
Inflation
Turning to inflation, food price uncertainties continue to weigh on the inflation trajectory going forward. A record rabi wheat production would help temper price pressure and replenish the buffer stocks. Moreover, early indication of a normal monsoon augurs well for the kharif season. International food prices also remain benign. The tight demand supply situation in certain categories of pulses and the production outcomes of key vegetables warrant close monitoring, given the forecast of above normal temperatures in the coming months. Frequent and overlapping adverse climate shocks pose key upside risks to the outlook on international and domestic food prices.
13. Cost push pressures faced by firms are seeing an upward bias after a period of sustained moderation. Deflation in fuel is likely to deepen in the near term, following the cut in LPG prices in March. Notwithstanding the cut in petrol and diesel prices in mid-March, the recent uptick in crude oil prices needs to be closely monitored. Continuing geo-political tensions also pose upside risk to commodity prices and supply chains. Assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent. The risks are evenly balanced.
