MPC Kept Interest Rate Unchanged and Real GDP growth projected at 7% for FY25
On 5th April, 2024, Monetary Policy Committee (MPC) has kept its interest rate unchanged. The MPC of the Reserve Bank of India (RBI), has announced its Monetary Policy Statement. Let us see the MPC statement in detail now
Monetary Policy Statement, April, 2024 – Interest rate unchanged & Real GDP projected at 7% for fiscal year 2024-25
MPC has kept the policy interest rate (i.e. Repo Rate) unchanged at 6.50 percent.
As a result the Standing Deposit Facility (SDF) rate remains at 6.25 percent and the Marginal Standing Facility remains at 6.75 percent.
The MPC keeps its focus on the withdrawal of accommodation to ensure that inflation aligns with the target gradually and supports growth.
MPC on Gross Domestic Product (GDP) Estimates
MPC stated that the Domestic Economy is showing strong momentum. It stated that according to the second advanced estimates real gross domestic product (GDP) expanded at 7.6% in 2023-24 thanks to the buoyant domestic demand. In third quarter (Q3), the real GDP increased by 8.4%, with lower drag from net external demand and stong investment activity.
MPC also noted that on the Supply Side, Gross Value added (GVA) increased by 6.9 percent in 2023-24 as it is mainly driven by the manufacturing and services sector.
MPC considered all these factors – including agricultural crop production, household consumption, imports, banks and business balance sheets, improved business sentiments and Governments’ Capital Expenditure – before they went for GDP growth projection for 2024-25.
On the risks side, geopolitical tensions, geoeconomic fragmentation, international financial market volatility, rising Red Sea disruptions, and extreme weather events,are taken into consideration.
Source: MPC Statement
MPC estimated that the real GDP growth for 2024-25 to grow at 7.0% with the first quarter (Q1) to grow at 7.1%; Q2 at 6.9%; Q3 at 7.0%; and Q4 at 7.0% (Chart 1). MPC stated that “the risks are evenly balanced”.
MPC on Inflation
MPC stated that the headline inflation has softened to 5.1% in January and February 2024, from 5.7% in December, 2023. It obsereved that inflation after correcting in January, food inflation increased to 7.8% in February mainly due to vegetables, eggs, meat and fish.
For the sixth consecutive month fuel prices remained deflationary in February. Core CPI (CPI minus food and fuel price indexes) disinflation took it down to 3.4% in February – one of the lowest in the current CPI series, with both goods and services components recording a decrease in price level (or say fall in inflation).
Source: MPC Statement
MPC estimated that, for 2024-25, the CPI inflation is estimated at 4.5 percent with Q1 at 4.9%, Q2 at 3.8% per cent; Q3 at 4.6%; and Q4 at 4.5% (chart 2), it is with an assumption of a normal monsoon year. It also stated that “the risks are evenly balanced”.
MPC Stance
The domestic economic activity remains resilent, with strong investment demand and upbat business & consumer sentiment, says MPC. It also stated that December’s headline inflation is peak; however, the food price pressure have been disturbing the ongoing disinflation process – this is posing challenges for the ultimate descent of inflation to the inflation target.
Other than these, the geo-political tensions, unpredictable supply side shocks from adverse climate events and their on agricultural production, and spillovers to trade & commodity markets add unccertainities to the outlook.
The MPC decided to keep the policy repo rate unchanged (i.e. 6.50%) in this meeting to keep the path of disinflation to sustain till inflation reaches the 4% target on a durable basis. To ensure the anchoring of inflation expectations and complete transmission, the monetary policy must continue its actively disinflationary pursuits.
The MPC is determined to bring inflation to target and will remain firm. The MPC believes that durable price stability would lay strong foundations for a period of high growth. The MPC also chose to remain focused on the withdrawal of accommodation to support growth and to ensure inflation gradually reaches its target.
Out of Six members of MPC, Five (5) members have voted for keeping the policy repo rate unchanged and one (1) member voted for the reduction of the repo rate.
Five (5) members voted for withdrawal of accommodation to ensure that inflation progressively aligns to the target with supporting growth and one (1) member voted for a change to a neutral stance.
Introduction of New Website and Mobile Application
RBI Governor released the new website and mobile application of the RBI on Friday (i.e. 5th April, 2024).
My Perspective and Takeaways
From the MPC statement, it is clearly visible that the RBI is committed to its inflation target of 4%. The deflationary trajectory remains the main aim for the RBI until inflation reaches its target. This time, from the MPC statement, it is clear that they are also vigilant on core inflation. This is the seventh time in a row that the that the RBI has kept its key interest rate unchanged. Food inflation still remains a greater concern and a big hurdle for the descent of overall inflation.
GDP growth projection of 7% seems realistic given the prevailing economic and global situations. It’s good to hear from the MPC after a long time that the focus is not only on inflation but also on supporting growth.
However, downside risks are equally high, which is where the policy framework plays a vital role in avoiding these risks.
It is to be mentioned that the quarterly GDP growth as well as inflation projections are revised marginally from the February 2024 MPC statements. However, overall growth and inflation remain the same.
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