RBI expects India’s GDP to grow at 7% in FY24; keeps repo rate unchanged

• RBI’s MPC keeps repo rate unchanged for the fifth time in a row.
• Most economists had unanimously expected a ‘pause’ for the fifth consecutive time.
• A few economists also expected the MPC to change its stance to ‘neutral’ from withdrawal of accommodation.

The Reserve Bank of India (RBI)’s Monetary Policy Committee unanimously decided to keep the repo rate unchanged at 6.5% for the fifth consecutive time on Friday. The central bank also revised its GDP growth projections for FY24 to 7% instead of 6.5% it had projected earlier.

This is after the second quarter’s GDP however threw in a surprise by coming in at 7.6%, much higher than RBI’s forecasts of 6.5%.

RBI’s real GDP growth forecast table

Period of time	RBI earlier forecast	Revised estimates	Actual GDP growth
FY24	6.6%	7%	NA
Q1 FY24	8%	NA	7.8%
Q2 FY24	6.5%	NA	7.6%
Q3 FY24	6%	6.5%	NA
Q4 FY24	5.7%	6%	NA

‘We don’t wait for the house to catch fire’

The MPC also decided to remain focussed on ‘withdrawal of accommodation’. This is to ensure inflation progresses along the target of 4%, said Shaktikanta Das, governor of RBI. It has also kept FY24’s CPI inflation projections unchanged at 5.4%.

Addressing the central bank’s decision to increase risk weightage on unsecured loans, the governor said it’s a pre-emptive measure to address potential risks. “We don’t wait for the house to catch fire and then act,” Das said in his speech.

The central bank has to be mindful of the risk of being carried away by a few months of good data. “We have to be watchful of new shocks that can hit the economy from anywhere anytime” he said.

Das also said that as the new year begins, the long awaited normalcy eludes the global economy. “In such volatile times, emerging markets have remained resilient to volatility," he said.

Experts expected the ‘pause’

Food inflation, which accounts for nearly half of the overall consumer price basket, rose 6.61% in October as compared with 6.56% in September. Consumer Price Index (CPI) is also expected to come around 5.4-5.5% by March 2023, though November and December inflation could overshoot 6%.

Says Mandar Pitale, head- treasury, SBM Bank India, “Overall data prints released after October MPC are supportive for MPC to continue with its current “withdrawal of accommodation” stance. The MPC is also likely to maintain the status quo on rates in the forthcoming policy announcement.”

A few also expected RBI’ MPC to change its stance to ‘neutral’ from withdrawal of accommodation. However, this may not happen just yet as the governor has been insisting on bringing inflation within its target of 4%.

A note by Yes Bank says that the 4% inflation target continues to elude, the only option for the RBI is to hold policy rates and keep the stance of ‘withdrawal of accommodation’ unchanged.

“Given its (RBI) worry on the personal credit space, the RBI is also unlikely to change its thoughts on tight liquidity conditions. While liquidity conditions are difficult to predict given volatility in flows, we think there ought to be more clarity on OMOs and the plans around the same,” said Yes Bank.

Sheersham Gupta, director and senior technical analyst at Rupeezy said that the spread of lending rates and repo rate have also been narrowing down in the past couple of months, indicating a more direct transmission of monetary policy.