RBI raises GDP growth forecast to 7%, points to risk of food inflation

“After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided unanimously to keep the policy repo rate unchanged at 6.5 per cent,” Das said, adding that the monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations.

This is the fifth consecutive policy when the RBI has left the repo rate — the rate at which RBI lends money to banks to meet their short-term funding needs — unchanged. Between May 2022 and February 2023, the repo rate was increased by 250 basis points (bps). One basis point is one-hundredth of a percentage point.

With the repo rate unchanged at 6.5 per cent, all external benchmark lending rates that are linked to the repo rate will not rise, providing relief to borrowers as their equated monthly instalments (EMIs) will not increase.

“Going ahead, 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 governor said.

The consumer price-based inflation (CPI), or retail inflation, moderated to 4.9 per cent in October from 7.4 per cent in July.

“Policymakers have to be mindful of the risk of being carried away by a few months of good data or by the fact that CPI inflation has come within the target range. They have to be also mindful of the risk of over-tightening, especially when large structural changes, geopolitical and geo-economic shifts are taking place,” Das noted.

He said the near-term outlook is masked by risks to food inflation which might lead to an inflation uptick in November and December, and moving forward inflation management cannot be on auto-pilot. The future path is expected to be clouded by uncertain food prices. CPI data for November is expected to be high, he said.

The RBI retained the consumer price-based inflation (CPI) forecast at 5.4 per cent for the current fiscal, with Q3 at 5.6 per cent and Q4 at 5.2 per cent.

In terms of reaching the inflation target of 4 per cent, the governor said there is still some distance to cover, and the MPC will take appropriate action to reach the target, based on the evolving situation.

“Reaching 4 per cent (inflation target) should not just be a one-off event. It has to be durably 4 per cent and the MPC should have confidence that 4 per cent has now become durable,” Das told reporters after announcing the monetary policy.

The six-member MPC in a majority of 5:1 also decided to keep the policy stance as ‘withdrawal of accommodation’ to ensure that inflation progressively aligns with the target, while supporting growth.

To a question on whether keeping the repo rate unchanged at 6.5 per cent and retaining as withdrawal of accommodation for five consecutive policies gives an unintentional indication of a neutral stance to the market, Das said that the RBI does not communicate anything inadvertently.

“We are very careful in our communication. There is no inadvertence in any of our communication. So, if somebody is assuming that it is a signal to move towards a neutral stance, I think it would be incorrect,” Das clarified.

When asked about the outlook on the repo rate, the governor stated that the RBI refrains from giving any forward guidance.

On growth, Das said that the economic activity exhibited buoyancy in the second quarter of FY24 aided by strong domestic demand. GDP posted a robust growth of 7.6 per cent in the July-September quarter higher than the RBI’s estimate of 6.5 per cent.

For the full fiscal, the RBI revised the real GDP growth projection to 7 per cent from an earlier forecast of 6.5 per cent, with Q3 at 6.5 per cent and Q4 at 6 per cent.

Looking ahead, Das said, private consumption should gain support from gradual improvement in rural demand, strengthening of manufacturing activity and continued buoyancy in services.

The healthy twin balance sheets of banks and corporates, high capacity utilisation, continuing business optimism and the government’s thrust on infrastructure spending should propel private sector capex.

“Headwinds from the geopolitical turmoil, volatility in international financial markets and geo-economic fragmentation pose risks to the outlook,” he said.