RBI’s Monetary Policy: Stability and Growth Outlook

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) recently concluded its assessment of the macroeconomic and financial landscape, making key decisions that impact India’s economic trajectory. Here’s a breakdown of the crucial highlights:

Policy Rate Unchanged

After a comprehensive evaluation, the MPC unanimously opted to maintain the policy repo rate at 6.50%. This decision ensures stability in the policy landscape.

Unchanged Deposit and Lending Rates

In line with the policy rate, the standing deposit facility (SDF) rate remains steady at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate are retained at 6.75%. These rates play a pivotal role in the functioning of the financial system.

Focus on Inflation and Growth

A majority of 5 out of 6 MPC members are committed to withdrawing accommodation to steer inflation toward the target while supporting economic growth. This demonstrates the MPC’s dual mandate of maintaining price stability and promoting economic growth.

Inflation Dynamics

RBI Governor Shaktikanta Das highlighted that headline inflation had surged, primarily driven by factors like tomato and other vegetable prices. Although there was a correction in August, further easing of inflation is expected in September due to moderation in these prices. A noteworthy aspect is the decline in core inflation, which excludes food and fuel components.

However, the inflation outlook is uncertain due to factors like reduced kharif sowing for key crops, low reservoir levels, and volatile global food and energy prices. The MPC recognizes that recurring food price shocks can contribute to generalized and persistent inflation.

Economic Resilience

While inflation poses challenges, India’s economic activity remains resilient. Factors such as strong domestic demand, consumer and business optimism, government capital expenditure, healthy financial positions of banks and corporates, and supply chain normalization contribute to economic buoyancy.

External Challenges

Yet, the economic landscape is not without challenges. Geopolitical tensions, geoeconomic fragmentation, global financial market volatility, a worldwide economic slowdown, and irregular monsoon patterns introduce risks to the outlook.

Growth Projections

Taking these factors into account, the RBI has projected real GDP growth for 2023-24 at 6.5%. This projection includes growth rates of 6.5% for Q2, 6.0% for Q3, and 5.7% for Q4. The risks to this outlook are considered balanced. Additionally, real GDP growth for Q1:2024-25 is projected at 6.6%.

Inflation Projections

CPI inflation for 2023-24 has been projected at 5.4%, consistent with the previous MPC meeting. The quarterly projections indicate 6.4% for Q2, 5.6% for Q3, and 5.2% for Q4. The risks to these inflation projections are evenly balanced, with CPI inflation for Q1:2024-25 projected at 5.2%.

In conclusion, the RBI’s MPC has chosen a path of stability by keeping the policy repo rate unchanged while closely monitoring inflation and growth dynamics. The economic landscape presents both opportunities and challenges, and the central bank stands ready to take necessary policy measures to align inflation with the target and anchor inflation expectations.

Source: The Hindu