Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday remained optimistic about the Indian economy while showing concerns around the inflation front. He said though India is poised to become the new growth engine of the world, high inflation is a major risk to macroeconomic stability and sustainable growth.
“The need of the hour is to remain vigilant and not give room to complacency. Lessons from the past one and a half decades and from living through the global financial crisis and the taper tantrum tell us that risks and vulnerabilities can grow even in good times,” the RBI governor said while presenting the fourth bi-monthly monetary policy of FY24.
Citing Kautilya’s Arthashastra, Das said macroeconomic stability and inclusive growth are the fundamental principles underlying a country’s progress.
Kautilya in his Arthashastra more than two thousand years ago had said:
“stability enables a state not only to share its wealth equitably but also augment it”.
Das said these words are relevant even today. In fact, they have eternal validity.
“The policy mix that we have pursued during the recent years of multiple and unparalleled shocks has fostered macroeconomic and financial stability. The external sector also remains eminently manageable. The twin balance sheet stress that was encountered a decade ago has now been replaced by a twin balance sheet advantage with healthier balance sheets of both banks and corporates. India is poised to become the new growth engine of the world,” the RBI governor said.
Remaining concerned about inflation, Das has identified high inflation as a major risk to macroeconomic stability and sustainable growth. “Accordingly, our monetary policy remains resolutely focused on aligning inflation to the 4 per cent target on a durable basis.”
Shaktikanta Das on Domestic Economy Growth
The RBI governor said the domestic economic activity exhibits resilience on the back of strong domestic demand. He said this is in contrast to global trends where the global economy is slowing under the impact of tight financial conditions, protracted geopolitical tensions and increasing
geoeconomic fragmentation. Global trade is contracting.
In India, the momentum in agricultural activity in Q2:2023-24 has been sustained, although the monsoon has been uneven. The industrial sector extended recovery in Q2. The manufacturing sector gained ground in July-August 2023, supported by key sectors such as pharmaceuticals, basic metals, cement, motor vehicles, and food products and beverages.
In India, the services sector activity is maintaining buoyancy as indicated by healthy expansion in high-frequency indicators in August-September.
Real GDP growth for 2023-24 is projected at 6.5 per cent with Q2 at 6.5 per cent; Q3 at 6.0 per cent; and Q4 at 5.7 per cent. The risks are evenly balanced. Real GDP growth for Q1:2024-25 is projected at 6.6 per cent.
On Inflation
The heightened inflation levels in July and August at 7.4 per cent and 6.8 per cent respectively, were largely driven by food price pressures. Vegetables, with a weight of around 6 per cent in the CPI basket, contributed to about one-third of CPI headline inflation in July and to around one-fourth of overall inflation in August. Sustained inflationary pressures in cereals, pulses, and spices added to the overall food inflation.
On the positive side, core inflation softened to 4.9 per cent during July-August 2023.
“While near-term inflation is expected to soften on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices, the future trajectory will be conditioned by a number of factors,” he said.
CPI inflation is projected at 5.4 per cent for 2023-24, with Q2 at 6.4 per cent, Q3 at 5.6 per cent and Q4 at 5.2 per cent. The risks are evenly balanced. CPI inflation for Q1:2024-25 is projected at 5.2 per cent.
The RBI’s Monetary Policy Committee on Friday decided to keep the repo rate unchanged at 6.5 per cent unanimously. This is the fourth time in a row that the central bank has paused the key interest rates. The RBI has retained the FY24 GDP projection at 6.5 per cent, and kept the inflation projection unchanged at 5.4 per cent for 2023-24.
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