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RBI Charts Course for Sustainable Growth: Inflation Control as the Key

RBI Charts Course for Sustainable Growth: Inflation Control as the Key

Introduction:

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) conducted its review on December 2023-2024, assessing both global and domestic economic conditions. The committee made decisions pertaining to key interest rates and provided insights into the outlook for the economy.

KEY DECISIONS:

In response to the prevailing and evolving macroeconomic conditions, the Monetary Policy Committee (MPC) convened on December 8, 2023, and arrived at several key decisions. The committee opted to maintain the policy repo rate at 6.50 percent within the liquidity adjustment facility (LAF). Additionally, the standing deposit facility (SDF) rate was held steady at 6.25 percent, while both the marginal standing facility (MSF) rate and the Bank Rate remained unchanged at 6.75 percent.

The MPC’s strategic focus is on gradually eliminating accommodation to ensure that inflation steadily approaches the set target. At the same time, the committee intends to offer the essential assistance for economic growth. These actions are consistent with the broader goal of meeting the medium-term target for Consumer Price Index (CPI) inflation, which is set at 4% within a +/-2% band, and thereby contributing to the development of sustainable growth.

GLOBAL ECONOMIC LANDSCAPE:

1. Global Growth: The committee acknowledged a varied deceleration in global growth among economies.
2. Inflation: Global inflation showed a downward trend but remained above target levels, with persistent underlying inflationary pressures.
3. Market Sentiments: Positive developments were noted since the previous MPC meeting, marked by declining sovereign bond yields, US dollar depreciation, and strengthened global equity markets. However, emerging market economies faced ongoing challenges with volatile capital flows.

DOMESTIC ECONOMIC OVERVIEW:

1. Economic Resilience: The domestic economy demonstrated resilience, evidenced by a robust 7.6 percent year-on-year growth in real GDP in Q2:2023-24. This growth was supported by strong investment and government consumption, mitigating the impact of net external demand.
2. Prospects for Consumption and Investment: Continued strength in manufacturing, buoyant construction, and a gradual rural sector recovery are anticipated to brighten household consumption prospects. Healthy balance sheets of banks and corporates, normalized supply chains, and rising public and private capital expenditure are expected to bolster future investments.
3. GDP Growth Projection: Taking into account various factors, the MPC projected real GDP growth for 2023-24 at 7.0 percent, with Q3 at 6.5 percent and Q4 at 6.0 percent. Projections for Q1:2024-25 are 6.7 percent, Q2 at 6.5 percent, and Q3 at 6.4 percent, with risks evenly balanced.

INFLATION OUTLOOK:

1. CPI Inflation: Headline inflation fell to 4.9 percent in October 2023 due to corrections in vegetable prices, fuel deflation, and broad-based moderation in core inflation. Risks include uncertainties in food prices, base effects, and volatile crude oil prices.
2. Inflation Projection: CPI inflation is projected at 5.4 percent for 2023-24, with Q3 at 5.6 percent and Q4 at 5.2 percent. Q1:2024-25 is expected at 5.2 percent, Q2 at 4.0 percent, and Q3 at 4.7 percent, with risks evenly balanced.

MPC DECISIONS AND RESOLUTIONS:

1. Policy Rates: The MPC unanimously voted to keep the policy repo rate unchanged at 6.50 percent.
2. Focus on Inflation Alignment: The majority of the MPC expressed commitment to withdrawing accommodation to align inflation progressively to the target while supporting growth. One member, Prof. Jayanth R. Varma, expressed reservations on this aspect.

FORWARD GUIDANCE:

The MPC emphasized the need for sustained disinflation, monitoring food price pressures, and remaining vigilant to potential challenges in crude oil prices and financial markets. The current policy stance is actively disinflationary, with preparedness for timely policy actions if warranted.

CONCLUSION:

In conclusion, the RBI’s Monetary Policy Review for December 23-24 reflects a cautious approach, balancing the need for inflation control with support for economic growth amidst a dynamic global and domestic environment.

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