As per the official data released by the government, the Indian economy grew at 7.6% in the July-September quarter (Q2 of the year 2023-24), beating estimates of a 6.8% rise for the quarter. Besides it has been the highest in the world in similar period. Considering that the growth rate achieved in the first half of the year is much better than expected due to continued government spending and some revival in private investment, many economists have raised their growth forecast to around 7 percent for the Indian economy which is higher than even the government’s estimate of 6.5%.
However, the RBI has kept status quo keeping the policy rates the same at 6.5%, fifth time in a row, by unanimous decision. Accordingly, the standing deposit facility (SDF) rate remains unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.
This is indicative of the RBI’s continued focus on pursuing disinflationary monetary policy. The last time the RBI raised the repo rate was in the month of February 2023 and it was raised by 25 basis points at that time. Besides, the RBI continued its stance on the withdrawal of the accommodations as the Indian economy continues its path to recovery.
Being Resilient under Divergent Global outlook
According to the RBI, the global growth is slowing at a divergent pace across economies. Inflation continues to remain above target levels and the underlying inflationary pressures stay relatively stubborn. The positives include improvement in the market sentiments, decline in the sovereign bond yields, depreciation in the US dollar and the strengthening of the global equity markets. However, the emerging market economies (EMEs) continue to face volatile capital flows.
As far as the domestic economic activity is concerned it is reported to be exhibiting resilience. The yearly real gross domestic product (GDP) has grown by 7.6 per cent in the second quarter of the financial year 2023-24 as compared to the similar period in the previous year largely attributable to robust investment and increase government consumption, which in a way cushioned the drag from net external demand. On the supply side, gross value added (GVA) rose by 7.4 per cent in Q2, due to buoyant manufacturing and construction activities.
The Risks are Balanced
The RBI projects the real GDP growth for 2023-24 at 7.0 per cent keeping in view the projected growth rate of 6.5 per cent in the third quarter and 6.0 per cent in the fourth quarter. However, the projections for the Real GDP growth for the next three quarters in the financial year 2024-25 are projected as 6.7 per cent for the first quarter and 6.5 and 6.4 per cent for the third and fourth quarter respectively (Refer Chart 1).
On the positive side, the strengthening of manufacturing activity, buoyancy in construction, and gradual recovery in the rural sector are likely to brighten the prospects of household consumption. Further, the healthy balance sheets of banks and corporates, supply chain normalization, improving business optimism, and rise in public and private capex are likely to give boost to investment in the months to come.
Besides, due to improvement in exports, the net external demand is expected to moderate. However, on the negative side, geopolitical turmoil, volatility in international financial markets and geo-economic fragmentation are going to pose challenges to the Indian economy. The risks are therefore projected to be evenly balanced.
Volatility in Prices may have to be Monitored
CPI headline inflation fell by about 2 percentage points to 4.9 per cent in October 2023 since the last meeting of the MPC due to:
1. sharp fall in correction in prices of certain vegetables,
2. deflation in fuel and
3. a broad-based moderation in core inflation.
However, there may be an increase in headline inflation in the month of November and December because of the lower base effect and the possible ill effects of El Nino weather conditions on both the Kharif harvest arrivals and rabi sowing. Even this challenge can be met by maintaining adequate buffer stocks for cereals, an expected fall in international food prices, along with pro-active supply side interventions by the Government which may as well keep a check on the inflationary rise in the food prices.
There is also possibility of volatility in the crude oil prices and persistence of price pressures in services and infrastructure sectors but at the same time the input costs and selling price may grow at a softer pace. Considering all the above factors, it is projected that inflation may be about 5.4 per cent for the year 2023-24. Assuming a normal monsoon next year, CPI inflation for the first quarter of the 2024-25 is projected at 5.2 per cent followed by 4.0 per cent and 4.7 per cent in the succeeding quarters respectively. The risks are thus reported to be evenly balanced. (Refer Chart 2).
Whither Interest Rates?
The Reserve Bank of India not given any forward indications on the interest rate trajectory probably due to the uncertainties present in the Indian and global economy particularly in the wake of higher expectations of inflation which is projected to remain high at in the month of November. However, it indicated that Monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target of 4 per cent within a band of 2 per cent on either side, while supporting growth.
The higher rate of growth has coincided with 11% rise in gross fixed capital formation in the July-September quarter, which is an indicator of robust investment growth as well. Moreover, the 13.3% growth in construction gross value added indicates public infrastructure/residential capex led investment sustained investment growth which may eventually lead to private capex recovery in sectors having backward and forward linkages with this sector. According to the RBI, improved momentum in investment demand along with business and consumer optimism, would support domestic economic activity and ease supply constraints.