The Indian economy is forging ahead in a challenging global environment on underlying macroeconomic fundamentals and buffers, and that the country's growth remains "on track", Reserve Bank of India (RBI) Governor Shaktikanta Das says in the central bank's monthly bulletin for October 2023.

He reiterates the RBI's inflation target of taming it at 4%, not "2 to 6%". "Our aim is to align inflation to the target on a durable basis while supporting growth," says Das, adding that the declining trend in inflation was interrupted in July-August 2023 due to price shocks in certain food items. He also says volatile energy and food prices amid geopolitical tensions and adverse weather conditions pose uncertainty to the inflation outlook.

In his rationale behind the Monetary Policy Committee's (MPC) unanimous decision to keep the policy repo rate unchanged at 6.50% this month, Das says: "Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points which is still working through the economy, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting."

Das says the transmission of the 250 basis points (bps) increase in the policy repo rate to bank lending and deposit rates is still incomplete, which is why the MPC decided to remain focused on the withdrawal of accommodation. "The MPC remains highly alert and prepared to undertake timely policy measures, as may be necessary, in order to align inflation to the target and anchor inflation expectations."

Notably, the RBI also maintained the status quo on the standing deposit facility (SDF) rate at 6.25% the marginal standing facility (MSF) rate, and the bank rate at 6.75%. By a majority of 5 out of 6 members, it also decided to remain focused on "withdrawal of accommodation" to ensure inflation progressively aligns with the target, while supporting growth.

On global growth, Das opines that the global economy is "slowing" under tight financial conditions, protracted geopolitical tensions, and increasing geoeconomic fragmentation. "Global trade is contracting. Headline inflation is easing but rules above the target in major economies."

He says major central banks are signalling a "peaking of their rate hike cycle". However, there are indications the "tight monetary policy stance could persist for longer" than anticipated earlier. "Sovereign bond yields have firmed up, the US dollar has appreciated, and global equity markets have corrected," says the RBI Governor.

Domestically, Das says the economic activity shows "resilience" amid strong domestic demand. "The momentum in agricultural activity in Q2:202324 has been sustained, although the monsoon has been uneven. The industrial sector extended recovery in Q2. Services sector activity is maintaining buoyancy...Investment activity maintained its momentum with good support from government capex."

The real GDP growth for 2023-24 is projected at 6.5%, with Q2 at 6.5%; Q3 at 6%; and Q4 at 5.7%. Real GDP growth for Q1 2024-25 is projected at 6.6%.

In his inflation outlook, Das maintains that while "near-term inflation is expected to soften" on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices, the future trajectory will be conditioned by a number of factors, including demand-supply mismatches, El Niño conditions, among others.

Notably, the RBI has projected the CPI inflation at 5.4% for 2023-24, with Q2 at 6.4%, Q3 at 5.6% and Q4 at 5.2%. CPI inflation for Q1:2024-25 is projected at 5.2%.

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