India is celebrating its 77th anniversary of independence, and the country’s economy is sound and stable. India has maintained a fair rate of growth and risen to the fifth-largest economy in the world despite global economic crises. Banks are sound, corporate balance sheets are solid, the external sector is robust, and inflation is under control. These solid macroeconomic foundations have established the framework for long-term growths. India is ideally situated to gain from the recent geopolitical realignments and technological advancements that are transforming the world economy. India has the potential to replace China as the world’s next economic engine because of its vast domestic market, undeveloped resources, and favorable demographics.
MPC’s rationale for its decisions on the policy rate and the stance- India’s inflation has been increasing recently after falling to a low of 4.3% in May 2023. Numerous variables, such as increased vegetable costs and potential El Nino weather conditions, are to blame for this. In an effort to curb inflation, the Reserve Bank of India (RBI) increased interest rates by 250 basis points, but this has not yet had a substantial effect. The MPC stated that although vegetable prices are anticipated to drive a spike in inflation in July and August, the shock may swiftly abate. The MPC also stated that despite weak foreign demand, domestic economic activity is holding up well and is expected to keep growing. The MPC made the decision to continue keeping an eye on the situation as it developed. In addition, they resolved to maintain the policy repo rate while being ready to adjust it if necessary. The MPC is still steadfast in its resolve to bring inflation under control and stabilise inflation expectations.
|Policy Repo Rate
|Standing Deposit Facility Rate
|Marginal Standing Facility Rate
Decisions and Deliberations of the Monetary Policy Committee (MPC):
The policy repo rate will remain at 6.50%, the standing deposit facility (SDF) rate will stay at 6.25%, the marginal standing facility (MSF) rate and the Bank Rate will remain at 6.75%, Repo Rate saw an increase of 250 bps (It was 4% In April 2022 & it’s 6.5% now).
MPC decided to focus on withdrawing accommodation to help align inflation with the target while still supporting growth.
Assessment of Growth:
- Global Economy:
The global economy is slowing down, Growth trajectories are diverging across regions, Inflation is moderating but still above target levels, Financial conditions are tight, Geopolitical conflicts and geo-economic fragmentation are simmering, Sovereign bond yields have hardened
Emerging Market Economies:
For several emerging market economies, weak external demand, elevated debt levels, and tight external funding conditions pose risks to their growth prospects.
India: Domestic economic activity is maintaining resilience. The total area sown under Kharif crops was 0.4% higher than a year ago as on August 4, 2023. The index of industrial production (IIP) expanded by 5.2% in May while core industries output rose by 8.2% in June. Amongst high-frequency indicators, e-way bills and toll collections expanded robustly in June-July, while rail freight and port traffic recovered in July after remaining muted in June. The composite purchasing managers’ index (PMI) rose to a 13-year high in July. The growth in passenger vehicle sales has, however, moderated. In the case of rural demand, tractor sales improved in June while two-wheeler sales moderated. Cement production and steel consumption recorded robust growth.
Assessment of Inflation:
Headline inflation:The MPC predicted in June that headline inflation would decline to 4.6% in Q1 of 2023–24. Due to an increase in food prices, headline inflation increased to 4.8% in June. Compared to its most recent peak in January 2023, core inflation has decreased by more than 100 basis points. Due to the increase in vegetable costs, headline inflation is anticipated to rise in the near future. After a few months, vegetable prices might experience a substantial correction. Although the forecast for Kharif crops has improved, there are still concerns about the future for domestic food prices. Additionally, there is a bias hardening in global food prices. Prices for crude oil have risen recently.
Outlook for 2023-24:With the price shock from vegetables as the primary factor, the MPC has increased its headline inflation prediction for the second quarter of 2023–2024. For a while, monetary policy may ignore high inflation prints brought on by such shocks. The risk of anchoring inflation expectations, however, is posed by the regular occurrences of repeated food price shocks. Continuous and prompt supply-side measures have a crucial role in reducing the intensity and duration of such shocks.
RBI’s GDP and CPI Estimates:
|GDP Current Estimates
|GDP Previous Estimates
|CPI Current Estimates
|CPI Previous Estimates
Liquidity and Financial Market Conditions:
Surplus Liquidity in the System: In recent months, the amount of excess liquidity in the system has increased. The re-entering of 2000-dollar bills into the banking system, the transfer of the RBI’s surplus to the government, an increase in public spending, and capital inflows are all responsible for this. In June and July 2023, respectively, the total daily absorption under the liquidity adjustment facility (LAF) was 1.7 lakh crore and 1.8 lakh crore. Despite this excess liquidity, the market did not show much interest in the RBI’s 14-day variable rate reverse repo (VRRR) auctions. Banks instead decided to deposit their excess cash in the less advantageous Standing Deposit Facility (SDF).
Measures to Impound Surplus Liquidity: The RBI has decided to impose an incremental cash reserve ratio (I-CRR) of 10% on the growth in net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023 in order to absorb the excess liquidity. This measure is just temporary, and it will be looked at again on September 8, 2023, whichever comes first. There will still be enough liquidity in the system to support the economy’s credit demands even after this brief impounding.
Current Account Deficit (CAD): India’s CAD was contained at 2.0% of GDP in 2022-23 as compared with 1.2% in 2021-22. The merchandise trade deficit narrowed in Q1 of 2023-24 with a contraction in imports exceeding a contraction in exports. Services exports and remittances are, however, expected to provide a cushion to the current account deficit.
Foreign Financing: FPI (foreign portfolio investment) flows have been strong so far in 2023–24. Up till August 8, 2023, net FPI inflows were US$ 20.1 billion, which is a record high compared to 2014–15. There were net outflows of $12.6 billion over the same time period the year before. With net inflows of US$ 6.0 billion from April to June 2023 as opposed to net withdrawals of US$ 2.9 billion the previous year. On the other side, India’s net FDI flows decreased from US$ 10.6 billion in April-May 2022 to US$ 5.5 billion in April-May 2023, suggesting a global slowdown in FDI flows. According to the most recent statistics, India’s external debt to GDP ratio decreased from 20.0% at the end of March 2022 to 18.9% at the end of March 2023.
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