MPC lowers projection for inflation, raises growth outlook a bit in FY24

Volatility in global financial market has potential upsides for imported inflation, says committee

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday slightly lowered its projection of retail price inflation by 10 basis points for FY24, projecting the rate of price rise to cool 40 basis points in the fourth quarter compared to its forecast earlier.

Economic growth is projected a bit higher, up by 10 basis points at 6.5 per cent for FY24 than expected earlier, said the MPC in a resolution. The third and fourth quarters are likely to give slightly higher growth in the gross domestic product (GDP) than expected earlier.  

Consumer price index (CPI)-based inflation rate is expected to be 5.2 per cent for FY24 than 5.3 per cent expected earlier. While the first quarter would see a slightly higher inflation at 5.1 per cent than 5 per cent expected earlier, the fourth quarter may see the rate of price rise at 5.2 per cent against 5.6 per cent projected in the February monetary policy review.

Milk prices may remain elevated even as the government, after a significant gap, is considering importing butter and ghee. The MPC attributed high milk prices to input costs and seasonal factors.

The committee said that while the expectation of a record rabi food grains production bodes well for food prices, the impact of the recent unseasonal rains and hailstorms needs to be watched.

Core inflation—related to non-fuel and non-food items—would also remain elevated due to lagged pass through of input costs, said the MPC, adding easing cost conditions are leading to some moderation in the pace of output price increases in manufacturing and services.

The MPC said global financial market volatility has surged, with potential upsides for imported inflation risks.

Also, crude oil prices outlook is subject to high uncertainty. MPC based its inflation projections on a normal monsoon and an annual average price of Indian basket of crude oil at $85 per barrel for FY24. The price averaged $84.89 a barrel till April five of the year.

The MPC’s economic growth projection of 6.5 per cent in FY24 aligns with the forecast made by the government’s Economic Survey under baseline scenario.

The committee’s slight upward revision about growth came even as both the World Bank and Asian Development Bank (ADB) scaled down their projections for India for FY24. The World Bank scaled it down to 6.3 per cent from 6.6 per cent earlier, while ADB lowered it to 6.4 per cent from 7.2 per cent earlier.

India's economy is officially projected to grow 7 per cent in 2022-23 against 9.1 per cent in the previous year. As such, the projected growth would be a three-year low.  

The committee said a good rabi crop should strengthen rural demand, while the sustained buoyancy in contact-intensive services should support urban demand. However, the external demand drag could accentuate, given slowing global trade and output, it warned.

It also listed protracted geopolitical tensions, tight global financial conditions and global financial market volatility as risks to its outlook for economic growth.