ExplainSpeaking | RBI Monetary Policy: Has the Indian economy reached the Goldilocks moment?

To be precise, the MPC neither changed the repo rate nor its policy stance. These are typically the two things it can change during a policy review.

The repo rate is nothing but the interest rate that RBI levies when it lends money to banks. The policy stance tells everyone what the MPC is trying to achieve by its actions. A policy stance tells us whether the MPC is trying to contain inflation or boost growth while containing inflation or simply being neutral.

There are two more things that observers watch out for in MPC statements: the outlooks on GDP growth and inflation.

Here, too, barely anything changed.

At 6.5%, the GDP growth forecast for the current financial year (2023-24 or FY24) stayed the same as it was in the April policy. To be sure, the MPC sits once every two months.

Further, at 5.1%, the inflation forecast for FY24 too stayed pretty similar to what it was in April.

As the Tables 1 and 2 on these forecasts show, it is not as if RBI doesn’t tweak quarterly forecasts, but overall, nothing much has changed.

Table 1: RBI’s GDP growth forecast for the same quarters over different meetings. (Source: RBI)

Table 2: RBI’s inflation forecast for the same quarters over different meetings. (Source: RBI)

Does that mean, at least according to the RBI’s MPC, India’s economy has reached a Goldilocks moment?

The reference to Goldilocks moment comes from the children’s tale about a girl Goldilocks who went inside the house of a family of three bears and chose the bowl of porridge which was just the perfect temperature — neither too hot, nor too cold. A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth).

Reading the MPC statement as well as looking at the latest RBI surveys on consumer confidence and people’s expectations of inflation does paint a fairly happy picture.

Here are some relevant takeaways:

1. The GDP growth of the financial year gone by has surprised on the upside; GDP growth for FY23 came in at 7.2% instead of RBI’s expectation of 7%.
2. On inflation, headline retail inflation fell to 4.7 per cent in April, the lowest reading since November 2021.
3. Looking ahead, as the Tables also show, the RBI is upbeat about both GDP growth and inflation in the current quarter (April, May, June). Growth has been pushed up to 8% and inflation knocked down to 4.6%.
4. Higher Rabi crop production — winter crop that is harvested in March & April — as well as the forecast of normal monsoon points to a recovery in consumption levels of the common Indian.
5. Further, the government’s continued thrust on capital expenditure is likely to crowd in private investments.
6. Consumer confidence is inching up. (See CHART 1)
7. Indian families expect inflation to moderate. (See CHART 2)

Chart 1: Consumer Confidence Indices. (Source: RBI)

Chart 2: Median Inflation Rate (Source: RBI)

However, while these are all positive developments, the MPC has chosen to stay vigilant — and not go to sleep like Goldilocks did after she had her fill of perfect porridge. Here are three reasons why.

• Despite many factors coming together, GDP growth rate is expected to decelerate in FY24 from 7.2% to 6.5%. Moreover, most professional forecasters that RBI polled pegged the GDP growth rate at 6%, suggesting that the eventual moderation might be far more substantial than what RBI expects.
• While consumer confidence metrics are improving they are still in the negative territory. An index below the 100 mark implies people are pessimistic and a value higher than 100 conveys optimism. Here’s a past edition that explained how to read RBI surveys.
• Similarly, even though inflation expectations are moderating they are still fairly high.
• Finally, there are many headwinds or factors capable of pushing against the economy. These include weak demand for our goods from the rest of the world (ROW) because the ROW is struggling to grow by itself, the volatility in global financial markets, continuing geopolitical tensions, and lastly the possible impact of El Nino (which can upset the normal monsoon).

See you tomorrow,

Udit