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RBI Meeting minutes highlight strong growth impulses for Indian economy
(24-Jun-2024, 11:47 Hours IST)

The RBI released minutes of forty ninth meeting of the Monetary Policy Committee (MPC) held during June 5 to 7, 2024 on Friday. The bank had kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at a seven year high of 6.50% in that meeting. Details of the minutes reveal MPC member Shashanka Bhide noted that macroeconomic environment was marked by a high growth rate of the economy and moderating inflation rate during 2023-24. The Provisional Estimates (PE) released by the National Statistics Office (NSO) on May 31, 2024, reinforce the previous growth assessment further. Real GDP growth for 2023-24 is now estimated at 8.2 per cent, following the growth rates of 7 per cent in 2022-23 and 9.7 per cent in 2021-22. While there have been significant fluctuations and differences between the macro estimates available at the time of April MPC meeting and the recent PE for sectoral growth rates and in the sources of aggregate demand on account of both external and domestic factors, the overall growth rate has remained strong, above the 7.6 per cent in the SAE. In the meantime, the headline inflation rate, year-on-year, is at 5.4 per cent for 2023-24 and 5 per cent in Q4: 2023-24. As the aggregate output projections for 2024-25 reflect strong GDP growth, keeping the monetary policy focus on achieving the inflation target on a durable basis is appropriate at this juncture.

Ashima Goyal stated that Indian growth has outperformed expectations once again, suggesting it has strong roots. Real policy rates near neutral, along with supply-side action, have been important in sustaining growth while bringing inflation towards target. As argued in earlier minutes, the neutral real policy rate (NIR) is around unity in Indian conditions of high unemployment and an ongoing transition to higher productivity employment.The headline inflation projection of 4.5% for 2024-25 gives an average real repo rate of 2% implying that the real repo rate will be above neutral for too long if the repo rate stays unchanged. Falling inflation has raised real repo above unity. This will reduce real growth rate with a lag. Expected growth is around 7% in 2024-25 below the 8% achieved in 2023-24. Status quoism is praised as being cautious. But if doing nothing distorts real variables it aggravates shocks instead of smoothing them and raises risk.

Jayanth R. Varma stated that it appears that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well. Professional forecasters surveyed by the RBI are projecting growth both in 2025-26 and in 2024-25 to be lower than in 2023-24 by more than 0.75%, and lower than the potential growth rate (of say 8%) by more than 1%. This is an unacceptably high growth sacrifice considering that headline inflation is projected to be only about 0.5% above target, and core inflation is extremely benign.

Rajiv Ranjan opined that growth continues to be robust and has surprised further on the upside. While core inflation has softened further, food inflation risks have remained elevated.The available high frequency indicators for April-May exhibits optimism to sustain momentum. Second, private consumption which was trailing will now get impetus from rebound in rural demand on the back of expected above normal south-west monsoon and improving agriculture sector. On the inflation front, headline and core inflation have moderated on anticipated lines. There is, however, little comfort in the near-term with inflation projected to remain sticky at around 4.9 per cent in Q1:2024-25 primarily due to the impact of unprecedented heat wave conditions on summer crop of vegetables and fruits; lower agricultural and horticulture production estimates; revision in milk prices across major cooperatives; and signs of a turnaround in commodity prices along with logistics and transportation costs.

RBI governor Shaktikanta Das noted that the Indian economy is growing at a healthy rate, averaging 8.3 per cent in the last three years. During 2023-24, the economy posted an impressive growth of 8.2 per cent despite continued global headwinds and weather vagaries. This was largely driven by domestic demand, especially investment activity. On the supply side, manufacturing and services provided major support to gross value added (GVA). Projections of improvement in global trade by agencies, when they materialise, will spur external demand. Considering these evolving dynamics, GDP growth projection for 2024-25 has been revised upward by 20 basis points to 7.2 per cent. When this happens, it will be the fourth consecutive year of 7.0 per cent or higher GDP growth.

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