RBI retains policy rate, ups growth projection
Both consumers and industry will take cheer from the RBI's growth projections, though – with an expanding economy likely to improve their own prospects.
The Reserve Bank of India’s (RBI) last monetary policy of the calendar struck a happy note by increasing its growth forecast to 7% even as it signalled that it is completely in control of the inflation side of the growth-inflation balance it is expected to manage.
“The summer of 2022 is behind us,” Reserve Bank of India governor Shaktikanta Das said after the last Monetary Policy Committee (MPC) meeting for 2023, signalling a guarded victory, and more importantly, a steadfast commitment to inflation management in the Indian economy. MPC increased the policy rate by 2.5 percentage points starting May 2022 to rein in inflation — and the latest headline numbers show that even core inflation is now in check, although the overall print is some distance away from RBI’s target of 4%.
In terms of policy instruments, this is reflected in the policy rate being left unchanged at 6.5% and the monetary policy stance continuing to be that of withdrawal of accommodation. While the former was a unanimous decision in MPC, the latter saw one dissension by Jaynath R Varma. It is likely the first cut in the policy rate will come only well into 2024 – something not likely to please borrowers, including consumers who have availed house loans and seen their loan tenures or monthly instalments increase.
But both consumers and industry will take cheer from the central bank’s growth projections, though – with an expanding economy likely to improve their own prospects.
RBI has upped its GDP growth forecast for 2023-24 from 6.5% to 7% between the October and December MPC meetings. GDP growth for the first three quarters of 2024-25, too, is expected to be healthy, at 6.7%, 6.5% and 6.4% respectively. MPC’s inflation forecast for 2023-24 has been retained at 5.4% and Consumer Price Index is expected to grow at 5.2%, 4% and 4.7% in the first three quarters of 2024-25. Deputy governor Michael Patra later told reporters that even the 7% forecast was conservative, hinting that the economy could expand at a faster rate.
To be sure, RBI has reiterated its commitment to bringing inflation down to the actual target of 4% and MPC’s forecasts do not see this happening until December 2024. In fact, some independent analysts expect the benchmark inflation rate to climb above the 6% mark in November and December. However, the tone and tenor of Friday’s MPC resolution and the RBI governor’s statement clearly suggests that monetary policy is not worried about the need to support growth at the cost of diluting its battle against inflation.
This is exactly what MPC did in the summer of 2022 when it did not increase interest rates until May 2022 even though headline inflation was more than 6% between January 2022 and April 2022. This ended in MPC failing in its mandate of keeping inflation in the 2%-6% target range for three consecutive quarters for the first time since its inception, and it had to submit a sealed report to the ministry of finance in keeping with the provisions of the inflation targeting framework.
MPC’s emphasis about not having to hold back on its inflation targeting role and stance, even though nobody really expects interest rates to increase, is coming not because the inflation situation is precarious but due to the fact that the Indian economy is growing at a healthy pace even without any support from monetary policy. This assessment is clearly visible in MPC’s latest growth and inflation projections.
“The GDP growth forecast for FY24 was raised to 7% from 6.5%. This was not just because 1H growth came in higher than the RBI’s forecast, but the central bank also raised the growth print for 2H (from 5.9% to 6.3%)”, Pranjul Bhandari, chief India economist for HSBC said in a note.
Some independent analysts do expect the economy to grow at a slightly lower pace than what RBI has projected. For example, this number is 6.6% for Emkay Global Financial Services, and 6.7% for Nomura, Citibank and Barclays.
While RBI’s projection of reasonably high growth and moderate inflation is good news from a macroeconomic point of view, it also means that debt servicing and mortgage payment costs for firms and households could increase; not because of a rate hike but transmission of policy rates to retail lending rates still being a work in progress.
“After plateauing out at its peak in 2023, monetary policy is likely to head into a softer zone in 2024. However, it is unlikely to be a sharp pivot as inflation will likely normalize only gradually and downside growth risks should be manageable. The 2H 2024 headline CPI would be trending closer to the RBI’s target of 4%, opening up some space for rate cuts as real policy rates would become ~200bps, much higher than the 100-150bps that RBI tends to prefer. Modest 50bps of repo rate cut in 2024 is possible in our baseline scenario, starting in August (vs June earlier). By that time, RBI would have more information on the global growth slowdown, monsoon progress and alignment of CPI closer to 4%,” Citibank chief India economist Samiran Chakraborty said in a note.
“We do not want to get carried away and label this policy a dovish pause. RBI sounded appropriately concerned on some other fronts. The governor spoke about the vegetable price shock which is likely to raise the inflation reading over November and December... Our sense is that this was a placeholder policy as the world shifts from rate hikes in 2023 to possible rate cuts in 2024. At a crossroads, RBI has kept itself open to all possibilities. It has acknowledged improved global settings via more balanced commentary of liquidity, and the growth and inflation outlook (discussed above). But it was sure to emphasise that it has its eyes firmly on the 4% target,” HSBC’s Bhandari added in her note.
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