RBI Forecasts Inflation Dip to 4.5% in 2024 – What This Means for Your Wallet!

The Reserve Bank of India (RBI) decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 % based on an assessment of the current and evolving macroeconomic situation. The Standing Deposit Facility (SDF) rate has been maintained at 6.25%. The Bank Rate also stays unchanged at 6.75%. Four out of six Monetary Policy Committee (MPC) members voted in favor of the rate decision.

The Real GDP growth is projected at 7.2% for 2024-25 (Q1 – 7.1%, Q2 – 7.2%, Q3 – 7.3%, and Q4 – 7.2%). This policy decision is in line with the RBI’s medium-term target of keeping consumer price index (CPI) inflation at 4% (+/- 2%) while supporting growth. RBI retained the inflation projection at 4.5% for the current year.

Some of the key highlights of the economic outlook given by the MPC of the RBI in its Monetary Policy Statement, 2024-25 Resolution – August 6 to 8, 2024, are as follows:

• The global economic outlook remains robust although with some restraint in growth. Major economies are witnessing a softening of inflation, even though services price inflation continues. The prices of food, energy, and base metals have started easing internationally. With contrasting growth-inflation prospects, central banks are varying in their approach. This has created an increase in volatility in financial markets. Along with recent sell-offs in global equity markets, the dollar index has declined, sovereign bond yields have come down, and gold prices have increased sharply.
• Economic activity remains bullish in the domestic market. The monsoon has picked up with improved distribution of rain across India. The monsoon recorded 7% higher rains over the long period average. This has helped in better kharif sowing (2.9% higher vs. last year). There has been a 5.9% expansion in y-o-y industrial output in May 2024. The core industries’ performance has also increased by 4% in June. Other high-frequency macro-economic indicators in June-July 2024 also show an expansion of services sector activity and a revival of private consumption, indicating an increase in private investment activity. Services exports and imports increased during the Apr – Jun quarter, along with merchandise exports and non-oil-non-gold imports.
• The expectation of an above-normal monsoon and an increase in kharif sowing indicate an improvement in rural demand. Urban demand is also expected to grow with improved manufacturing and services sector performances. With a sustained thrust on infrastructure spending by the government, along with an increase in steel consumption, high-capacity utilization in manufacturing, and a healthy banking sector, there is a positive outlook for economic growth.

There are risks due to geopolitical reasons, an increase in volatility in international commodity prices, and the alignment of geoeconomic groups that may adversely impact the growth outlook for the economy.

The markets and investors were hopeful that the RBI would relax its overall outlook on inflation due to expectations of a cut in interest rates by the Federal Reserve in the US in September this year and the overall souring of sentiments in the global market. While the Indian equities market has fared better than its global peers, the Central Bank had to intervene as the Rupee fell to all-time lows vs. the USD. Despite these challenges, the RBI remains committed to fostering economic stability and growth, balancing inflation control with the promotion of domestic demand and investment.

Source: Reuters – (India News | Today’s Top Stories | Reuters) 8th Aug 2024

Source: RBI (Reserve Bank of India – Press Releases (rbi.org.in) 8th Aug 2024.