The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday decided to increase the policy repo rate by 25 basis points to 6.50% with immediate effect after assessing the macroeconomic situation.
There are two main reasons for the hike – global economic uncertainties and sticky core inflation even as India’s consumer price inflation fell below the upper tolerance level of 6%, thanks to a strong decline in prices of vegetables. Despite India’s robust economic growth as compared to other major economies, the central bank is cautious, which is the need of the hour because of geopolitical developments that may significantly disrupt global supply chains and stoke inflation.
It seems to be a good balance between keeping inflation under control and at the same time allowing the economy to grow. This is reflected in RBI Governor Shaktikanta Das’ statement that after adjusted for inflation the repo rate “still trails its pre-pandemic levels” and “liquidity remains in surplus”.
The decision of the central bank should also be seen in the light of the Union Budget presented by Finance Minister Nirmala Sitharaman on February 1 that focused on over ₹10 trillion capital expenditure in 2023-24, which certainly would spur growth. The RBI projects the GDP for FY 24 at 6.4%, which is a conservative estimate compared to the Economic Survey that gave a range of 6-6.8% with a baseline at 6.5%. Both official figures are significantly high compared to projected growth forecasts of several leading economies.
{{/usCountry}}The decision of the central bank should also be seen in the light of the Union Budget presented by Finance Minister Nirmala Sitharaman on February 1 that focused on over ₹10 trillion capital expenditure in 2023-24, which certainly would spur growth. The RBI projects the GDP for FY 24 at 6.4%, which is a conservative estimate compared to the Economic Survey that gave a range of 6-6.8% with a baseline at 6.5%. Both official figures are significantly high compared to projected growth forecasts of several leading economies.
{{/usCountry}}Industry has also acknowledged the potential of the Indian economy. “The historic outlay on capital expenditure, amounting to 3.3 per cent of GDP, is well placed and will set in motion a virtuous cycle by also crowding in private investments,” said Subhrakant Panda, President, FICCI.
In this situation, RBI’s cautious approach is desirable. While RBI’s inflation projection for FY24 at 5.3% is below the upper threshold, it is not yet very comfortable as global geopolitical situations are still evolving and world economies could face more uncertainties. Naturally, RBI is more focused on keeping inflation under check.
India is better placed than many other countries, far better than our neighbours, thanks to our conservative, prudent and calibrated fiscal and monetary policies. India is looking ahead for better times, as governor Das said: “Going ahead, the food inflation outlook will benefit from a likely bumper rabi harvest led by wheat and oilseeds. Mandi arrivals and kharif paddy procurement have been robust, resulting in improvement in buffer stocks of rice. All these developments augur favourably for the food inflation outlook in 2023-24.”
He is, however, cautious about core inflation. “Considerable uncertainties remain on the likely trajectory of global commodity prices, including price of crude oil. Commodity prices may remain firm with the easing of Covid-19 related restrictions in some parts of the world. The ongoing pass-through of input costs, especially in services, could keep core inflation at elevated levels,” he said.
Under these circumstances, one thing is clear – interest rates are expected to remain elevated in months to come unless global supply chains normalise; and food, fuel and fertiliser rates stabilise.