RBI hikes inflation projection to 5.4%; repo rate unchanged

Sandeep Dikshit

New Delhi, August 10

The RBI’s Monetary Policy Committee (MPC) has decided unanimously to keep the policy repo rate unchanged at 6.5 per cent for the third time in a row.

Explaining the MPC’s rationale for keeping the interest rates unchanged, RBI Governor Shaktikanta Das said the spike in tomato and cereal prices warranted heightened vigil on the evolving inflation trajectory. Headline inflation, after reaching a low of 4.3 per cent in May, rose in June and is expected to surge till August led by vegetable prices.

GDP projection

Q1: 8% | Q2: 6.5% | Q3: 6% | Q4: 5.7%

Given the continuing uncertainties, the RBI revised upwards its consumer price index (CPI) inflation projections for 2023-24 to 5.4% as against its June 8 forecast of 5.1%. The tomato price shock has led to headline inflation projection for the second quarter, revised up to 6.2% from the earlier 5.2%. The RBI retained its projections for real GDP growth for 2023-24 at 6.5%. The GDP growth for the first quarter of the current fiscal has been projected at 8%; Q2 at 6.5%; Q3 at 6% and Q4 at 5.7%. Real GDP growth for 2024-25 is projected at 6.6%.

Prospects bright

The Indian economy is exuding enhanced strength and stability despite global shocks… it’s now 5th largest economy contributing 15% to global growth. —Shaktikanta Das, RBI Governor

Das painted a bright picture of the Indian economy, saying it was “exuding enhanced strength and stability” despite the massive shocks to the global economy in recent years. Growing at a reasonable pace, it is now the fifth largest economy in the world and contributing around 15 per cent to global growth.

Overall, India’s strong macroeconomic fundamentals have laid the foundations for sustained growth and it can become an engine for global growth. Industrial activity was holding ground, said Das while referring to the latest data on index of industrial production (IIP), core industries output and purchasing managers’ index (PMI) for manufacturing.

The level of surplus liquidity in the system has gone up due to return of Rs 2,000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows. As a result, the RBI chief announced that in the fortnight beginning August 12, 2023, scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28. The I-CRR will be reviewed on September 8.

Tomato still ‘red hot’

The RBI chief said the spike in tomato and cereal prices warranted heightened vigil on the evolving inflation trajectory. Headline inflation, after reaching a low of 4.3% in May, rose in June and is expected to surge till August led by vegetable prices.