RBI Has Done Its Job Well, Raised GDP Growth Forecast To 7% For FY24; What This Means For Indian Economy?

While maintaining the repo rate steady at 6.5% on Friday, and retaining its inflation target at 5.4% for the current fiscal, RBI's biggest move was to increase the GDP growth target to 7% from its earlier 6.5% for 2023-24. Not just that RBI has also raised quarterly estimates of GDP. This hints that global uncertainties are the least of worries for the resilient Indian economy which is leading currently in the world. The majority of experts said RBI has done its job well in taming inflation which has bolstered economic growth ahead.

In its bi-monthly monetary policy for December 2023, RBI said, domestic economic activity is exhibiting resilience. Real gross domestic product (GDP) grew year-on-year (y-o-y) by 7.6 per cent in Q2:2023-24, underpinned by robust investment and government consumption, which cushioned the drag from net external demand. On the supply side, gross value added (GVA) rose by 7.4 per cent in Q2, driven by buoyant manufacturing and construction activities.

RBI added that continued strengthening of manufacturing activity, buoyancy in construction, and gradual recovery in the rural sector are expected to brighten the prospects of household consumption. Healthy balance sheets of banks and corporates, supply chain normalisation, improving business optimism, and a rise in public and private capex should bolster investment going forward.

With improvement in exports, the drag from external demand is expected to moderate. Headwinds from the geopolitical turmoil, volatility in international financial markets and geoeconomic fragmentation pose risks to the outlook, it said.

Accordingly, RBI raised its GDP growth estimates to 7% for FY24, a hike of 0.5% from earlier 6.5%. Also, the central bank raised estimates to 6.5% in Q3FY24 from earlier 6% and increased to 6% from earlier 5.7% in Q4FY24. In the case of FY25, RBI projected GDP growth at 6.7% in Q1, 6.5% in Q2 and 6.4% in Q3. It said, "The risks are evenly balanced."

In its statement, RBI governor Shaktikanta Das said, "Against this unsettled global economic backdrop, the Indian economy presents a picture of resilience and momentum. The real gross domestic product (GDP) growth for Q2 of the current financial year has exceeded all forecasts. The fundamentals of the Indian economy remain strong with banks and corporates showing healthier balance sheets; fiscal consolidation on course; external balance remaining eminently manageable; and forex reserves providing a cushion against external shocks."

Das added, "These factors, combined with consumer and business optimism, create congenial conditions for sustained growth of the Indian economy. Looking ahead, it is our endeavour to further build on these fundamentals which are the best buffer against global shocks in today's uncertain world."

Similar opinions were held by experts as well!

Shreyansh Shah, Research Analyst, StoxBox said, "As expected, the RBI kept the repo rate unchanged at 6.5% and reiterated that the Indian economy has remained resilient with strong fundamentals. The surprise element in the MPC outcome was a significant upward revision in the GDP growth forecast and now the GDP growth forecast for FY24 stands at 7.0% from earlier projection of 6.5%. Also, the quarterly growth forecast for the next few quarters were upwardly revised which shows that the Indian economy is least affected by the global economic uncertainty and is treading through rough waters with ease."

Shah added, "We believe that the central bank has done its job well in controlling the inflation and bring it below 5%, though more work needs to done to have inflation in the guided range of 2-4%. We believe that food inflation is still a concern to further lower the inflation trajectory and the RBI will remain watchful on the same. However, it was surprising that though the RBI increased the risk weights to keep control over unsecured loans but kept at bay any measures to lift the affordable housing market which is impacted due to high cost of funds."

Furthermore, Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers said, "The RBI maintained the exact status quo with regard to policy rates and liquidity stance, as anticipated. The RBI has increased its GDP forecast for FY24 by 50 basis points, to 7%, while leaving the inflation forecast unchanged. Although the magnitude of the GDP forecast upgrade exceeded our initial projections, all other declarations and positions remained largely consistent with our expectations. As of now, the RBI anticipates that liquidity conditions will remain stable. The policy was, on the whole, less hawkish than had been anticipated."

Hajra added, "Simultaneously, the governor issues specific warnings regarding premature adjustments to monetary policy rates and liquidity stance, which indicate that the rate pause and liquidity withdrawal stance may persist for a longer duration than initially expected. We maintain our assessment that no rate reductions would occur until the latter part of fiscal year FY25. An upward adjustment to the GDP forecast would have a favourable effect on market sentiment."

Also, Shah believes that the central bank would keep the key rate unchanged until the end of 1QFY25 as the earlier rate actions are still working through the economy.