RBI pegs FY25 growth at 7%, inflation at 4.5% | Latest News India - Hindustan Times

RBI pegs FY25 growth at 7%, inflation at 4.5%

By, New Delhi
Feb 09, 2024 06:24 AM IST

The Reserve Bank of India (RBI) has kept the policy rate unchanged for the sixth consecutive time, citing global uncertainty and the need to bring down retail inflation to 4%. The RBI expects GDP growth in the next financial year to be at 7%. The tone of the Monetary Policy Committee's resolution was hawkish, which suggests a delay in rate cuts. The RBI has prioritized inflation targeting over growth due to geopolitical risks and supply-side shocks to food inflation. Despite strong economic growth, the central bank remains cautious about inflation risks.

The Reserve Bank of India on Thursday decided to keep the policy rate unchanged for the sixth time in a row, citing global uncertainty and the need to bring down retail inflation to 4 %, and said that it expects GDP growth in the next financial year to be at 7%.

RBI governor Shaktikanta Das addresses a press conference on monetary policy in Mumbai on Thursday. (ANI)
RBI governor Shaktikanta Das addresses a press conference on monetary policy in Mumbai on Thursday. (ANI)

While the tangible decisions of the MPC -- policy rate and monetary policy stance -- have both remained unchanged in keeping with market expectations, the tone of the MPC resolution borders on the hawkish and has added an element of delay to the timeline of rate-cuts.

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“Monetary policy must continue to be actively disinflationary to align inflation to the target of 4 % on a durable basis”, Governor Shaktikanta Das said in his statement after the bimonthly Monetary Policy Committee (MPC) of the RBI on Thursday.

To be sure, RBI’s overzealous take on fighting inflation might also be a result of the fact that domestic growth continues to be strong --- next year’s 7% would be the third consecutive year growth will have been above that number if the forecast comes to bear --- and headwinds to growth are more likely from external than domestic factors.

In what was the last MPC meeting for the fiscal year 2023-24 and before the 2024 general elections, the central bank stuck to its guns on the need to prioritise inflation targeting over growth in the wake of elevated geopolitical risks and supply side-driven shocks to food inflation. These downside risks, the MPC noted, call for a continuation of the withdrawal of the accommodation stance of monetary policy.

MPC has increased interest rates by 250 basis points – one basis point is one hundredth of a percentage point – between May 2022 and February 2023 and has held the policy rate unchanged at 6.5% since then. Both these decisions by the MPC saw a dissent by Prof Jayanth R Varma, who asked that the monetary policy stance be changed to neutral and the policy rate be brought down by 25 basis points.

MPC’s hawkish tone on inflation targeting needs to be seen in the context of the Indian economy doing very well on the growth front and retaining its position as the fastest growing major economy in the world. MPC’s latest resolution expects GDP growth in 2024-25 to be 7%, which will mean that India is set to achieve three consecutive years of 7% or higher growth.

Quarterly growth projections released by the MPC suggest that it has made an upward revision to its growth projections since its December 2023 policy meeting. GDP growth in the quarters ending June 2024, September 2024 and December 2024 is now expected to be 7.2%, 6.8% and 7% compared to the December 2023 forecasts of 6.7%, 6.5% and 6.4%.

Inflation, on the other hand, is expected to come down from 5.4% in 2023-24 to 4.5% om 2024-25. Quarterly inflation forecasts for the quarters ending June 2024, September 2024, December 2024 and March 2025 are 5%, 4%, 4.6% and 4.7%. Notwithstanding the predictions of a significant decline in inflation in the next fiscal year and core inflation – it measures the non-food non-fuel component of the CPI basket – reaching a four-month low in December 2023, the MPC resolution sounded a note of caution on inflation risks.

“On the inflation front, large and repetitive food price shocks are interrupting the pace of disinflation that is led by the moderation of core inflation. Geopolitical events and their impact on supply chains, and volatility in international financial markets and commodity prices are key sources of upside risks to inflation…The MPC will carefully monitor any signs of generalisation of food price pressures to non-food prices which can fritter away the gains in the easing of core inflation,” the MPC resolution said.

“The Indian economy is making confident progress on a strong, sustained and transformative growth path. Domestic and international investors are reposing greater confidence on India’s economic prospects. In our assessment, the current setting of monetary policy is moving in the right direction with growth holding firm and inflation trending down to the target”, Das said in his statement justifying monetary policy’s focus on inflation rather than growth.

On the liquidity front, the Governor was careful to emphasise surplus liquidity turning into deficit was not to be misconstrued as a reflection of the withdrawal of accommodation stance of monetary policy. “Let me reiterate that our policy stance is in terms of interest rate which is the principal tool of monetary policy in the current framework…So far as liquidity conditions are concerned, these are being driven by exogenous factors, which are likely to correct in the foreseeable future, aided by our market operations,” his statement said.

Experts believe that RBI’s emphasis on inflation control has introduced an element of delay in interest rate reduction. “The Reserve Bank of India kept its policy rate and stance unchanged in a 5-1 vote. We think the statement was still hawkish, citing possible generalisation of supply shocks to headline inflation. We continue to expect rate cuts from June 2024, with some risk of a delay,” Rahul Bajoria, MD & head of EM Asia (ex-China) Economics, Barclays, said in a note.

“Going forward, we feel that RBI would remain cautious given the risk posed by high food inflation. Healthy economic growth gives room to the Central Bank to maintain status quo for some more time. However, in the second half of the year, as domestic inflationary concerns recede and the US Fed starts cutting rates, we can expect a shallow rate cut by RBI,” Rajani Sinha, chief economist, CareEdge Ratings said in a note.

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    Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.

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