RBI's latest monetary policy is on expected Lines

The combined (Centre plus states) capital outlay (capital expenditure minus loans and advances) recorded a growth of 36.7 per cent in April-October 2023 as against 29.4 per cent last year. There is an indication of better capacity utilisation increased by 40 bps to 74 per cent. Both merchandise and services exports recorded positive growth in October

The Reserve Bank of India (RBI) released its Monetary Policy after three days of deliberations by the Monetary Policy Committee (MPC). The committee unanimously decided to keep the policy repo rate unchanged at 6.50 per cent. Consequently the Standing Deposit Facility (SDF) rate remains unchanged at 6.25 per cent and the marginal standing facility (MSF) and the bank rate at 6.75 per cent. MPC continued its policy of withdrawal of accommodation to ensure that the inflation progressively aligns to the target of four per cent by a majority of 5 out of 6 members.

Even though headline inflation (CPI) moderated from 7.4 per cent in July to 4.9 per cent in October, the RBI expects risks to inflation from food prices with uptick expected in November and December. There has been uneven monsoon and rainfall and the reservoir of water in various dams has been substantially at lower levels. It is stated that the persistence of inflation pressures across sub-groups such as cereals, pulses and spices and pickup in inflation in eggs, fruits and sugar , however has kept food inflation in October elevated even though overall CPI has moderated.

As on December,1, 2023, rabi sowing stood at 434.7 lakh hectares (out of full season normal area of 648.3 lakh hectares) which is 5.3 per cent lower than last year, but 4.3 per cent higher than the five-year average (normal average) as on date.

In the backdrop of this, RBI expects that going ahead inflation outlook would be considerably influenced by uncertain food prices. High frequency food price indicators point to an increase in prices of vegetables which may push CPI inflation higher in the near term. Elevated global sugar prices remain a matter of concern.

Apparently, the central bank is particularly concerned about food and vegetables prices going up resulting in a higher inflation for November and December, even though prices of global commodities like agricultural commodities have softened except for rice.

Edible prices continue to remain soft, crude oil prices have recently softened, though they remain volatile.

Taking these factors into consideration, RBI has forecast CPI inflation for 2023-24 at the earlier esteemed level of 5.4 per cent with retaining Q3 at 5.6 per cent and Q4 at 5.2 percent. CPI inflation for Q1 2024-25 projected at 5.2 per cent, Q2 at 4.0 per cent and Q4 at 4.7 percent.

Looking at these projections of headline inflation and RBI yet to reach the target of four per cent inflation, the pause in respect of Repo rate may continue for some more time and the rate cut is not expected in the immediate future.

RBI will continue to monitor the evolving situation and continue the tight financial conditions even on the liquidity management front, ensuring no excess liquidity in the system and controlling the volatility in prices both from monetary action by RBI as well as supply measures from the government. RBI will remain alert to the risks of any shocks becoming generalised and derailing disinflation process. RBI has reiterated that based on evolving situation, MPC will take appropriate action to reach the four per cent target.

On the domestic growth, with the economy posting a robust growth of 7.6 per cent in Q2 2023-24, RBI has enhanced its earlier projected GDP growth of 6.5 per cent to seven per cent. Most of the high frequency indicators point out higher growth, as the government has been spending on capex. On the supply side, real gross value added (GVA) rose by 7.4 per cent, powered by 13.9 per cent increase in manufacturing and 13.4 per cent in construction. Eight core industries grew by 8.4 per cent in June, 8.5 per cent in July, 12.5 per cent in August, 9.2 per cent in September and 12.1 per cent in October. PMI manufacturing continued to expand at 56 per cent in November, while PMI services continued to expand at 56.9 per cent in November. The combined (Centre plus states) capital outlay (capital expenditure minus loans and advances) recorded a growth of 36.7 per cent in April-October 2023 as against 29.4 per cent last year. There is an indication of better capacity utilisation increased by 40 bps to 74 per cent. Both merchandise and services exports recorded positive growth in October. Various such positive indicators led RBI to enhance GDP growth to seven per cent for 2023-24 with Q3 at 6.5 per cent and Q4 at six per cent. The real GDP growth for Q1 2024-25 is projected at 6.7 per cent, Q2 at 6.5 per cent and Q4 at 6.4 per cent. These indicators of enhanced growth point at India's highest growth in spite of the fragile global economy.

The country’s external sector is also looking brighter, with Foreign Portfolio Investment (FPI) inflows of $ 24.9 billion up to December 6 as against net outflows in the preceding two years.

However, the net FDI has moderated to $ 10.4 billion in April-October from $ 20.8 billion a year ago. Net inflows of ECB were to the tune of $ 3.9 billion during April-October as against net outflows of $ 4.2 billion a year ago. Non-resident deposit accounts witnessed higher net inflows at $ 5.4 billion during April -October as compared with $ 2.8 billion a year ago. India's foreign exchange reserves stood at $ 604 billion as on December 1, thereby having import cover of 10 months.

India had a cover of 18 months sometime back and the current cover of 10 months looks better, when one looks at the global volatility. RBI expects current account deficit (CAD) to be modest and comfortably financed. It opines that the stability of the Indian rupee reflects the improving macroeconomic fundamentals of the economy and it's resilience in the face of formidable global tsunamis.

Global factors like heightened debt levels, lingering geopolitical hostilities and extreme weather conditions are the factors that are affecting global growth and inflation outlook. India also needs to be vigilant about global front factors affecting domestic growth and inflation along with the risks of food and vegetables price hike. RBI's fight against inflation is not yet over and the present policy of controlling inflation and providing a boost to growth by way of government support has been positive for India.

(The author is former Chairman & Managing Director of Indian Overseas Bank)