Repo Rate Unchanged; RBI Sees FY24 GDP Growth at 7%, Inflation at 5.4%
Moneylife Digital Team 08 December 2023
As predicted by economists, the monetary policy committee (MPC) of Reserve Bank of India (RBI) kept the repo rate unchanged at 6.50% during its February bi-monthly meeting. RBI increased its gross domestic product (GDP) growth by 50bps (basis points) to 7% while keeping its consumer price index (CPI) inflation unchanged at 5.4% for FY23-24.
Announcing the decision of the MPC after its three-day deliberations, RBI governor Shaktikanta Das says, "After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC decided unanimously to keep the policy repo rate unchanged at 6.50%. Consequently, the standing deposit facility (SDF) rate remains at 6.25%, and the marginal standing facility (MSF) rate and the bank rate remain at 6.75%. The MPC also decided by a majority of five out of six members to remain focused on withdrawing accommodation to ensure that inflation progressively aligns to the target while supporting growth."
According to RBI, since the last policy, consumer price index (CPI) headline inflation has moderated to 4.9% in October from 7.4% in July. "The moderation was observed in all components of CPI - food, fuel and core (CPI excluding food and fuel). There has been broad-based easing in core inflation, which is indicative of successful disinflation through monetary policy actions. The near-term outlook, however, is masked by risks to food inflation, which might lead to an inflation uptick in November and December. This needs to be watched for second round effects, if any. Domestic economic activity is holding up well as assessed in the previous MPC meetings and as reflected in the second quarter (Q2) of FY23-24 GDP growth."
Against this backdrop, Mr Das says, the MPC decided to keep the policy repo rate unchanged at 6.50% but remain highly alert and prepared to undertake appropriate policy actions, as warranted. "Monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations. The rate action so far is still working its way into the economy. Hence, the MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth," he added.
RBI sees private consumption gaining support from gradual improvement in rural demand, strengthening of manufacturing activity and continued buoyancy in services. The healthy twin balance sheets of banks and corporations, high capacity utilisation, continuing business optimism, and the government's thrust on infrastructure spending should propel private sector capacity expansion capex. At the same time, the drag from external demand is also expected to moderate with a turnaround in merchandise and services exports, the central bank says. 
However, according to the RBI governor, protracted geopolitical turmoil, volatility in global financial markets, and growing geo-economic fragmentations pose risks to the outlook.  
Considering all these factors, Mr Das says that real GDP growth for FY23-24 is projected at 7%, with the third quarter (Q3) at 6.5% and Q4 at 6%. "Real GDP growth for Q1 FY24-25 is projected at 6.7%; Q2 at 6.5% and Q3 at 6.4%. The risks are evenly balanced."
According to RBI, food inflation, which was in double-digits in July, has since then moderated to 6.2% in October with the correction in vegetable prices. Fuel inflation has also slipped into deflation since September, primarily reflecting the sharp fall in liquified petroleum gas (LPG) prices at the end of August. The disinflation in the core gathered momentum during  September-October. It reached levels last seen during Q4 FY19-20 due to the combined effect of policy rate increases and reduction in cost-push pressures across core goods and services.
Going ahead, RBI says, the inflation outlook would be considerably influenced by uncertain food prices. "High-frequency food price indicators point to an increase in prices of key vegetables which may push CPI inflation higher in the near term. The ongoing rabi sowing progress for key crops like wheat, spices and pulses needs to be closely monitored. Elevated global sugar prices are also a matter of concern," it added.
The central bank sees CPI inflation at 5.4% for FY23-24, with Q3 at 5.6% and Q4 at 5.2%. CPI inflation for Q1 FY24-25 is projected at 5.2%, Q2 at 4% and Q3 at 4.7%. 
Governor Das says RBI has made significant progress in lowering inflation to below 5% in October 2023 despite occasional blips due to intermittent supply shocks. "The Summer of 2022 is behind us. Our policy of prioritising inflation over growth, hiking the policy rate by 250bps in a calibrated manner and draining out excess liquidity have worked well,  alongside supply-side measures taken by the government, to bring about this disinflation. The fact that core inflation has also trended lower and household inflation expectations have become better anchored gives us the confidence and conviction that monetary policy is doing its job. On the other hand, growth remains resilient and robust, surprising everyone on the upside."
Notwithstanding this progress, the governor says the target of 4.0% CPI has yet to be reached, and RBI has to stay the course. He says, "Headline inflation continues to be volatile due to multiple supply side shocks which have become more frequent and intense. The trajectory of food inflation needs to be closely monitored. Intermittent vegetable price shocks could once again push up headline inflation in November and December." 
"While monetary policy would look through such one-off shocks, it has to stay alert to the risk of such shocks becoming generalised and derailing the ongoing disinflation process. In the midst of these uncertainties, monetary policy has to remain actively disinflationary to ensure a durable alignment of headline inflation to the target rate of 4% while supporting growth," he added.
Mr Das also announced additional measures, including reviewing regulatory frameworks for foreign exchange derivative transactions, connected lending, web-aggregation of loan products, setting up a fintech repository, and enhancing unified payment interface (UPI) transaction limit for hospitals and educational institutes to Rs5 lakh from Rs1 lakh per transaction.
RBI also decided to enhance the limit of e-mandates for recurring online transactions like payments of mutual fund subscriptions, insurance premium subscriptions and credit card repayments to Rs1 lakh per transaction from Rs15,000 without the additional factor of authentication (AFA).
For the financial sector in India, RBI says it is working on establishing a cloud facility for this purpose. "Such a facility would enhance data security, integrity and privacy. It would also facilitate better scalability and business continuity. The cloud facility is intended to be rolled out in a calibrated fashion over the medium term," it added.
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