As expected, the central bank’s monetary policy committee (MPC) kept the benchmark repo rate unchanged at 6.5% and retained the policy stance at withdrawal of accommodation. Given the lack of surprises on the rate front, the 10-year benchmark bond traded flat, closing 3 basis points higher at 7.27%. However, the higher GDP projection cheered the stock market, with both benchmark indices touching new records during the day.

The RBI attributed its decision to raise the growth outlook to data supporting revival of rural demand, certain high-frequency indicators, capital expenditure by the government and expectations of a pick-up in private capex amid rising capacity utilization.

“India’s gross domestic product (GDP) growth remains resilient and robust as reflected in our projection of 7% growth in the current year,” governor Shaktikanta Das told reporters after the MPC meeting.

Das pointed out the 6.4% rural volume growth in fast-moving consumer goods in the second quarter, and the 20.7% jump in two-wheeler sales in the 42-day festive period across October and November as signs of rural recovery. He added that demand for work under the national rural job guarantee scheme fell 4.6% in November, its first decline this financial year. Falling demand for guaranteed 100-day work under the Mahatma Gandhi National Rural Employment Guarantee Scheme indicates stronger rural employment and rising economic activity.

Deputy governor Michael Patra said even the new growth estimate of 7% is “conservative”, considering high-frequency data from October and November. “As you know, the first half’s estimate has beaten all estimates including ours, and if you just put that actual number and the projection that we made in the last policy together, you will come to a number close to 7%, or 7%,” Patra said.

The Indian economy grew at 7.7% in the first six months of the current financial year. The government agrees with the central bank assessment, a top finance ministry official said.

“Certainly, we agree with the RBI’s assessment. It is quite obvious, (with) the growth that India has achieved in the first half of the year and the two months of the current quarter. High-frequency indicators are showing good momentum; so, this upward revision is well-spaced,” said Ajay Seth, secretary of the department of economic affairs. The government will continue to take necessary supply-side measures to keep food prices under control, he added.

“India’s growth engine can now become faster and accelerate if the much-awaited private capital formation kicks into higher gear,” chief economic adviser V. Anantha Nageswaran said.

“While the decision to keep the repo rate unchanged underscores that inflation management continues to be the top priority, particularly in the broader context of global macroeconomic uncertainties, the upward revision in GDP growth forecast instils confidence in the India opportunity among both domestic and global investors,” said Ashu Khullar, chief executive officer, Citi India.

Not everyone is convinced, though. Madan Sabnavis, chief economist at Bank of Baroda wrote in a note that there are downside risks from rabi crop sowing due to the impact of El Nino, and therefore, a possible faltering of agriculture growth in the coming quarters.

“This may hurt rural demand. In addition to this, waning base effect will also no longer provide support to growth figures, and we thus maintain our growth forecast of 6.6-6.7% for FY24,” said Sabnavis.

While keeping the inflation forecast unchanged, the central bank reiterated that price rise has to be contained on a durable basis.

Das said the central bank has made “significant progress” in containing inflation below 5% in October, despite occasional blips arising from intermittent supply shocks. The trajectory of food inflation needs to be closely monitored, he said.

“Notwithstanding this progress, the target of 4% CPI is yet to be reached and we have to stay the course,” said Das.

RBI had followed its pandemic-era easy-money policy with a cumulative 250 basis point (bps) hike in policy repo rate between May 2022 and February, maintaining a pause since.

“The summer of 2022 is behind us,” said Das, referring to the runaway price rise witnessed last year.

Das said that core inflation has also trended lower and household inflation expectations have become better anchored. This, he said, gives RBI the confidence and conviction that monetary policy is doing its job. In October, India’s retail inflation stood at 4.87%, after 5.02% in September and 6.83% in August. RBI expects retail inflation to meet its target of 4% only in the second quarter of FY25.

Based on Das’s commentary and reading between the lines of RBI’s growth and inflation forecast, experts ruled out any rate cut in the next two policies.

“Whether these upbeat (GDP) numbers signal that there is room for monetary policy to remain tight for longer or in fact assume support from some easing in monetary policy remains an open question. For now, we continue to expect the RBI to start its rate cut cycle not before the June/August policy in 2024,” said Abheek Barua, chief economist and executive vice-president, HDFC Bank.

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Published: 08 Dec 2023, 11:16 PM IST