RBI MPC Outcome: Governor Das Holds FY25 Inflation Forecasts Stable At 4.5%, Retains GDP Projection

On Thursday, August 8, the Reserve Bank of India (RBI) confirmed that its Monetary Policy Committee (MPC) has retained its growth projection for India's Gross Domestic Product (GDP) at 7.2% for the fiscal year 2025. This steady outlook reflects the central bank's confidence in the country's economic trajectory despite global uncertainties and inflationary pressures.

RBI Governor Shaktikanta Das revealed that the GDP growth rate for the first quarter of FY25 is estimated at 7.1%, with subsequent quarters projected at 7.2% and 7.3%. For the fourth quarter, the growth rate is expected to return to 7.2%.

"Q1FY25 growth estimate moderated due to updated information on certain high-frequency indicators," Das said, indicating that the central bank is attentive to real-time economic signals. Furthermore, the RBI estimates a 7.2% GDP growth for the first quarter of FY26, showing confidence in sustained economic momentum.

Alongside growth projections, the RBI has maintained its Consumer Price Index (CPI) inflation forecast for FY25 at 4.5%. "It is important for policy to stay the course while maintaining close vigil on inflation. Without price stability, high growth cannot be sustained. We have decided to focus on inflation and ensure price stability mainly to support growth," emphasized Das. This statement highlights the RBI's dual mandate of fostering growth while containing inflation.

The MPC's decision to keep the key lending rate unchanged at 6.5% for the ninth consecutive time aligns with this cautious approach. The committee, by a 4:2 majority, decided to remain focused on the "withdrawal of accommodation" policy stance. This means that while no new liquidity-boosting measures are being introduced, the existing ones will be gradually phased out.

Das pointed out that core inflation continues to soften, providing some respite. Additionally, a positive monsoon and healthy Kharif crop sowing are expected to ease food inflation, a concern for the Indian economy. The MPC's quarterly inflation projections are set at 4.4% for July-September 2024, 4.7% for October-December 2024, 4.3% for January-March 2025, and 4.4% for April-June 2025.

The Governor also noted that several central banks globally are pivoting their policies, reflecting a broader trend towards addressing inflation while supporting growth. Despite a positive near-term outlook, Das acknowledged challenges to medium-term global growth, urging vigilance and proactive policy measures.

India's retail inflation rose to 5.08% in June 2024 from 4.80% in May, driven by higher food and beverage prices. Over the past year, food inflation has averaged 8%, exerting persistent pressure on the headline inflation rate. Core CPI, which accounts for a significant portion of the overall CPI gauge, increased slightly to 3.13% in June from 3.07% in May.

Both rural and urban inflation rates saw an uptick in June, with rural inflation rising to 5.66% and urban inflation to 4.39%. Given these inflationary pressures, economists had widely anticipated the RBI's decision to maintain the status quo on rates.

Das highlighted that the moderation in headline inflation due to a favourable base is expected to reverse in the third quarter of the financial year. Therefore, the policy must continue to be disinflationary and resolute in its focus on bringing inflation down to 4%.

The RBI's unchanged growth projection of 7.2% for FY25, coupled with a steady inflation forecast, indicates a stable yet vigilant economic outlook. As the global economic landscape evolves, the RBI's policies will likely remain dynamic, reflecting both domestic imperatives and international trends.