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The Reserve Bank of India raised the repo rate by 50 basis points (bps) to 5.9% in the recently concluded MPC meeting to tame inflation. The RBI’s monetary policy committee (MPC) expects uncertainty surrounding the course of geopolitical conditions to weigh heavily on inflation in the coming months. However, the stock market reacted positively to the decision with both the benchmark indices rising more than 1.5% in the afternoon.
Out of the six members of the MPC, Shashanka Bhide, Jayanth R. Varma, Rajiv Ranjan, Michael Debabrata Patra and Shaktikanta Das voted to increase the policy repo rate by 50 bps, while Ashima Goyal voted to increase the repo rate by 35 bps. Meanwhile, five members except Jayanth R. Varma voted to remain focused on withdrawal of accommodation to ensure inflation remained within the target of 2-6%.
India’s central bank said that global economic activity continues to weaken due to the Ukraine-Russia conflict and aggressive monetary policy actions across the world, leading to rising risks of recession in advanced economies.
On the domestic front, late recovery in sowing augurs well for kharif output, said the RBI. The central bank said prospects for the rabi crop are buffered by comfortable reservoir levels. However, the risk of crop damage due to excessive or unseasonal rains remains and it is likely to affect food prices.
The RBI noted that India is facing imported inflationary pressures and it remains an upside risk for the future trajectory of inflation, amplified by strengthening US dollar.
The outlook for crude oil prices is highly uncertain due to geopolitical developments, with concerns relating to both supply and demand.
Taking into account these factors and an average crude oil price (Indian basket) of $ 100 per barrel, inflation is projected at 6.7% in FY23, according to the RBI. For Q2, Q3 and Q4, inflation is estimated at 7.1%, 6.5% and 5.8% , respectively. Inflation based on Consumer Price Index for Q1FY24 is projected at 5%.
Economic Growth Forecast
The central bank said that the outlook for aggregate demand is positive, with rural demand catching up and urban demand expected to strengthen further with the typical upturn in the second half of the year. The improving outlook for agriculture and allied activities as well as recovery in services sector are expected to boost the prospects for aggregate supply.
Going forward, the government’s continued push on capital expenditure, improvement in capacity utilisation in manufacturing and pick-up in non-food credit is expected to sustain the expansion in industrial activity, which was stalled in July.
Meanwhile, consumer outlook remains stable and companies in manufacturing, services and infrastructure sectors are optimistic about demand conditions and sales prospects, according to RBI surveys.
Nonetheless, headwinds due to geopolitical tensions, hawkish stance by global central banks and slowing external demand pose downside risks to net exports and have a negative impact on India’s GDP outlook.
In this backdrop, real GDP growth for FY23 is projected at 7%, compared to earlier projection of 7.2%. For Q2, Q3 and Q4, GDP growth is estimated at 6.3%, 4.6% and 4.6%, respectively. For Q1FY24, GDP is predicted at 7.2%.