In the last monetary policy meeting, RBI left the policy rate unchanged, but they clearly indicated that it was just a pause and not necessarily a policy pivot. Since the last MPC meeting, as expected inflation has been on a downward trajectory, with CPI inflation going below 6% in the last two months and WPI index contracting in the last month. Core CPI inflation has also moderated below 6%.
With inflation trend abetting, RBI is likely to leave the policy rate unchanged in the June meeting. However, the concerning aspect is that while food inflation has started moderating, cereal inflation still remains in double digits. Milk inflation has also been hovering at a high of 8-9% and is concerning. Categories like cereal and milk that are of daily household consumption requirement have a strong bearing on household inflationary expectations.
Moreover, any weather-related disruptions could have an adverse impact on food prices. While IMD has forecast a normal monsoon, but the risk of El Nino can’t be ignored. Geo-political disruption and consequent impact on global commodity prices is the other risk for inflation. Given the uncertainties, RBI is likely to maintain the inflation projection at 5.2% for FY24, till we get more visibility on the monsoon.
As far as growth is concerned, GDP data surprised on an upside. The GDP growth for Q4 at 6.1% and for the full year of FY23 at 7.2% was higher than market expectations. While external demand remains weak, moderation in import growth and consequent narrowing of trade deficit has been supportive of GDP growth.
As far as domestic demand is concerned, there could be some waning of pent-up demand in coming quarters. But with CPI inflation moderating, we expect overall consumption demand to improve. Rural demand that had been lagging is already showing signs of improvement as indicated by FMCG companies. Many of the high frequency economic indicators like PMI-Manufacturing and services, e-way bill collection, car sales and GST collections are showing robust trend. Having said that the latest IIP data that showed a marginal growth of around 1% (YoY) in March, with contraction in both consumer durables and non-durables index is concerning.Private sector is showing increasing intent to invest (as reflected by the CMIE data). However, for a broad-based improvement in private investment, it would be critical for consumption growth momentum to gather pace. The main risk to GDP growth is the global vulnerabilities that could impact Indian economy through various channels. A severe El-Nino is the other big risk that could jeopardize the rural demand recovery. However, with IMD so far projecting a normal monsoon, RBI is likely to stick to its GDP growth projection of 6.5% for FY24. RBI’s growth projection is already at the upper band of market expectations.
Will RBI continue with its stance of ‘withdrawal of accommodation’? As Professor Jayanth Varma had highlighted in the minutes of the last MPC meeting, RBI has already removed accommodation through effective rate hikes of 315 bps. . The current stance of RBI appears to be an indication that RBI will remain vigilant given that inflation is still above their target of 4%.
Should we start expecting rate cuts by RBI soon? While inflation is moderating, a durable fall to the target of 4% looks difficult in FY24. While there is likely to be moderation, GDP growth would still be above 6%. With GDP growth not very concerning and CPI inflation above target, RBI is likely to maintain status quo in rates in 2023.
Given the dynamic and volatile economic landscape, not just RBI, other global central banks including US Federal Reserve have also indicated that their decisions going forward will be data dependent. Globally, the Central Banks want to keep the window open for reacting as per evolving dynamics and want the market participants to remain cautious and alert.
(The author is the chief economist at CareEdge)