Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil the fifth monetary policy of the financial year 2023-24 on Friday, December 8, after a two-day review, as it observes the impact of global headwinds on India’s macroeconomic indicators such as inflation trajectory and growth in gross domestic product (GDP).
The review by the six-member Monetary Policy Committee (MPC) led by Das will likely indicate the course RBI will adopt in the remainder of the financial year as it seeks to strike a fine balance between sustaining growth and bringing inflation under the 4 per cent target amid high food prices.
Economists expect RBI to hold rates steady
According to the majority of economists on D-Street, the RBI would keep its key repo rate unchanged at 6.50 per cent at the conclusion of the December 6-8 MPC meeting, continuing its hawkish stance. Analysts also do not expect the central bank to change its stance from ‘withdrawal of accommodation’. However, the recent decline in crude oil prices and bullish economic growth in the July-September quarter are likely to keep the MPC’s focus on inflation.
‘’We expect the Reserve Bank of India to remain hawkish at the upcoming policy as growth continues to show strength while inflation risks linger on,” Sakshi Gupta, Principal Economist, HDFC Bank, Gurugram. Analysts also say that the central bank may start easing monetary policy in the second half of 2024.
“An economy on fire, and the persistent food inflation threat, suggest to us that the RBI will be in no hurry to loosen policy,” Capital Economics’ Thamashi De Silva said. De Silvia added that she expected the central bank to start its easing cycle in the second half of 2024, much later than most major emerging economies.
Here are the key indicators to watch out for during the December 2023 MPC:
Inflation:
India’s consumer price index (CPI)-based inflation eased to a four-month low in October at 4.87 per cent from 5.02 per cent in September, edging closer to the central bank’s target of 4 per cent. The central bank, in its October MPC minutes-of-the-meeting, highlighted that India’s headline inflation is ruling above the tolerance band and its alignment with the target is getting interrupted.
Hence, the RBI’s monetary policy needs to remain actively disinflationary, it said in its MPC minutes. MPC members noted that if the inflation projections of 5.2 per cent in Q4 2023-24 and 4.3 per cent in Q4 2024- 25 hold, the alignment of inflation to the target could be underway. However, there is still a need to guard against risks from recurring weather-related events and rises in global energy prices.
The RBI has been mandated by the government to ensure the consumer price index (CPI)-based inflation remains at 4 per cent, with a margin of 2 per cent on either side. With sticky retail inflation – breaching the MPC’s upper threshold of 6 per cent and the US Fed’s persisting hawkish stance, the RBI is likely to keep the repo rate unchanged.
Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy – helping the inflation rate decline.
Growth:
The Indian economy grew 7.6 per cent during the July-September quarter of the current financial year 2023-24 (Q2FY24), remaining the fastest-growing major economy in the world, according to the GDP data.
The GDP growth in the September quarter rose sharply above D-Street estimates along with growth projections by the RBI. The RBI had maintained real GDP growth for 2023-24 at 6.5 per cent with Q2 at 6.5 per cent, Q3 at 6.0 per cent, and Q4 at 5.7 per cent.
S &P Global Ratings said that India’s economy in FY24 will grow at a faster clip than it previously projected before hitting a slower-than-estimated trajectory in the next financial year. The rating agency revised the GDP growth projection for financial year 2024 to 6.4 per cent from 6 per cent earlier on the back of strong domestic tailwinds.
Liquidity:
The central bank is likely to maintain its focus on liquidity management and credit growth in the upcoming MPC policy decision. Leading global bank Barclays underlined in its report RBI’s disinterest in tightening liquidity excessively in the present scenario.
“We think the bank will likely want to avoid a relapse of the weighted average credit rating below/ around the repo rate due to excess liquidity conditions, which implies it will continue to conduct two-way operations as needed,” stated Barclays in its report.
Bank credit growth continues to be at elevated levels, mainly due to personal loans, which are growing around around 30 per cent annually. RBI Governor Das had flagged this rapid growth in the October MPC meeting, advising banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms and address the build-up of risks.
