RBI Retains CPI Target At 5.4% For FY24; Expects Food Inflation To Rise From Nov-Dec

The Reserve Bank of India (RBI) has decided to maintain the status quo, keeping the benchmark interest rate (repo rate) at 6.5%. The announcement, part of the fifth bi-monthly policy for the financial year 2023-24, unfolded after a three-day meeting of the Monetary Policy Committee (MPC). However, this latest policy lies in a significant upward revision of the GDP growth forecast, revealing the robust resilience of the Indian economy despite global economic uncertainties.

The RBI MPC projects Consumer Price Index (CPI) inflation at 5.4% for the fiscal year 2023-24 (FY24), holding steady from previous estimates. For the third quarter (Q3FY24), the inflation projection has been marginally adjusted downward to 5.4% from the earlier figure of 5.6%. Looking further ahead into the fourth quarter (Q4FY24), the forecast remains unchanged at 5.2%.

Looking at the economic landscape for the first quarter of the fiscal year 2024-25 (April-June), the RBI maintains its inflation forecast at 5.2%. The outlook for the subsequent quarters sees a positive trend, with the CPI inflation forecast for July-September 2024 pegged at 4.0% and October-December 2024 forecasted at 4.7%.

The RBI MPC opted to keep key interest rates unchanged. The repo rate remains at 6.5%, while the Standing Deposit Facility and Marginal Standing Facility rates are held steady at 6.25% and 6.75%, respectively.

The MPC's decision-making is the majority vote, five out of six members, to remain focused on the 'Withdrawal of Accommodation.' This approach aims to ensure that inflation progressively aligns with the target while still providing support for overall economic growth.

RBI Governor Shaktikanta Das, in his remarks, asserted the necessity for an actively disinflationary monetary policy. Despite commendable progress in lowering inflation, Governor Das emphasized that the 4% target is yet to be reached, requiring a sustained commitment to the current course of action.

"The near-term outlook, however, is masked by risks to food inflation which might lead to an inflation uptick in November and December. This needs to be watched for second-round effects, if any. Domestic economic activity is holding up well as assessed in the previous MPC meetings and as reflected in the Q2:2023-24 GDP growth," said RBI Governor, Shaktikanta Das.

Governor Das highlighted a positive development in the form of broad-based easing in core inflation, indicative of successful disinflation through monetary policy actions. However, he cautioned against complacency, pointing out that the near-term outlook is clouded by risks to food inflation. There's a potential for an uptick in inflation in November and possibly December, necessitating careful monitoring for second-round effects.

A notable relief for the Indian economy comes in the form of a sharp drop in crude oil prices after a continued surge. This development holds particular significance for India, heavily reliant on imports for more than 85% of its oil requirements.

Recent data indicates a positive trend as India's Consumer Price Index (CPI)-based inflation eased to a four-month low of 4.87% in October, down from 5.02% in September. This brings the inflation rate closer to the central bank's target of 4%. However, the RBI, in its October MPC minutes, expressed concerns about headline inflation persisting above the tolerance band, interrupting its alignment with the target.

StoxBox Research Analyst, Shreyansh Shah, commented on the MPC outcome. While the repo rate remained unchanged as anticipated, Shah pointed out a significant upward revision in the GDP growth forecast. The revised GDP growth forecast for FY24 now stands at 7.0%, up from the earlier projection of 6.5%.

Shah also expressed optimism about the RBI's efforts in controlling inflation, acknowledging the successful reduction below 5%. However, he emphasized that there is still work to be done to bring inflation within the guided range of 2-4%. Shah highlighted food inflation as a lingering concern that requires further attention from the central bank.

Shah also noted that while the RBI increased risk weights to control unsecured loans, no measures were taken to address the challenges faced by the affordable housing market, which continues to grapple with high costs of funds.

Looking ahead, Shah anticipates that the central bank is likely to keep the key rate unchanged until the end of the first quarter of FY25, as the effects of earlier rate actions continue to work through the economy.