What RBI Governor Shaktikanta Das Said About Future Inflation, Growth, Global Economy

RBI Governor Shaktikanta Das on Thursday presented the first bi-monthly monetary policy of FY24, surprisingly announcing a pause on the repo rate hike after six consecutive hikes since May last year. He said the Indian economic activity remains resilient, but there are global headwinds due to geopolitical tensions. He also said the inflation, however, has eased. Here’s all what he said about inflation, growth and overall global economy.

On Inflation

• The softening of inflation during November-December 2022 turned transitory with CPI headline breaching the upper tolerance threshold in January-February 2023.
• A sharp turnaround in food inflation drove the pickup in headline inflation as core inflation remains elevated across goods and services.
• Looking ahead, the expectation of a record rabi harvest bodes well for the easing of food price pressures. There are already evidence of a correction in wheat prices in March on supply-side interventions by the government. The impact of the recent unseasonal rains in some parts of the country, however, needs to be watched.
• Global commodity prices have moderated significantly from the heightened levels a year ago.
• Adverse climatic conditions are a risk to the future inflation trajectory. Milk prices are likely to be firm going into the summer season due to tight demand-supply conditions and fodder cost pressures.

On GDP Growth

• India’s real GDP is projected to have grown by 7 per cent in the financial year 2022-23. Hence, economic activity remains resilient.
• On the supply side, the rabi crop production is estimated to increase by 6.2 per cent in FY23.
• PMI manufacturing remains robust. Services sector activity exhibits buoyancy.
• Aggregate demand conditions remained resilient in Q4 of FY23, even as private consumption showed some signs of a slowdown.
• Urban demand indicators like passenger vehicle sales and credit card spending registered robust growth in February, while consumer durables contracted in January.
• Rural demand indicators, such as consumer non-durables, and tractor & two-wheeler sales registered healthy growth.
• The drag from the net external demand continues due to increased global headwinds. The protracted geopolitical tensions and global financial market volatility pose downside risks to the outlook.
• The real GDP growth for FY24 is projected to grow 6.5 per cent, with Q1 at 7.8 per cent, Q2 at 6.2 per cent, Q3 at 6.1 per cent, and Q4 at 5.9 per cent. Risks are evenly balanced.

On Global Economy

• The global economy is now witnessing a renewed phase of turbulence with fresh headwinds from the banking sector turmoil in some advanced economies.
• With the fight against inflation far from over, the global economy is now confronted with serious financial stability challenges from the recent banking sector developments in some advanced economies.
• Bank failures and contagion risk have brought financial stability issues to the forefront. Given the stubbornness in inflation, central banks continue to tighten monetary policy, although at a reduced pace. Inflation globally has moderated in the recent months, but its descent to the target is proving to be long and arduous
• What we are witnessing today is unprecedented uncertainty in geopolitics, economic activity, price pressures and financial markets never seen before. One can imagine the magnitude of challenges central banks and other policy makers face in today’s world.
• Supply chains are returning to normalcy globally as well as domestically.
• The sudden announcement of an output cut by OPEC+ a few days ago and the resultant jump in crude oil prices is yet another evidence of this volatility.

The RBI MPC on Thursday unanimously decided to keep the repo rate unchanged at 6.50 per cent. The pause comes after six consecutive rate hikes since May 2022, and the RBI has raised the repo rate by 250 bps since then. The RBI MPC also voted to remain focussed on ‘withdrawal of accommodation’ by 5:6 majority. This is to ensure that inflation aligns with target while focussing on growth.

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