It was surely a bright and sunny monetary policy amidst difficult times. Here is why we say that it is a bright and sunny monetary policy announced on 08th February 2023 by the RBI Monetary Policy Committee. The RBI hiked the rates by 25 bps to 6.50%. That makes it a full 250 bps higher since May 2022. But that was not all. The RBI MPC also hiked the growth estimate for FY23 by 20 bps from 6.8% to 7.0%, in line with the MOSPI first advance estimate of FY23 GDP. In addition, the RBI MPC also cut the inflation estimate for FY23 by 20 bps to 6.50%. How do we interpret this amalgam of announcements?
The lowered inflation estimate hints at the direct impact of lower food and fuel prices, even as core inflation remains elevated. The higher GDP estimate indicates that the RBI expects the real growth rate to benefit from a turnaround in the global economy as well as lower inflation. Then why did the RBI hike rates by 25 bps? It is a signal that the economic momentum is strong enough to weather higher rates. Also, the higher rates is a signal that inflation may have reduced but the problem of inflation has not gone away.
Highlights of the February 2023 monetary policy
Even ahead of the monetary policy announcement, the consensus on the street already was that the rates would be hiked by 25 bps. Here are some key takeaways.
The policy has shown a lot more confidence that Indian economy may have turned the most critical corner and now they can afford to play the balancing game in their own way.
Inflation lowered by 20 bps; GDP growth hiked by 20 bps
Inflation estimate for FY23 has been lowered by 20 bps from 6.7% to 6.5%. what is still more encouraging is that this assumes crude at $95/bbl. In reality, crude has been hovering around $80/bbl and even assuming a rapid recovery in China, cheap Russian oil is likely to keep inflation in check. The surprise could be on the positive side rather than on the negative side. Core inflation remains high so a lot will depend on the Rabi sowing season. The break-up of lowered 6.5% retail inflation for FY23 is as under: Q4FY23 at 5.7%, Q1FY24 at 5.0%, Q2FY24 at 5.4%, Q3FY24 at 5.4% and Q4FY24 at 5.6%. Inflation estimate for FY24 has been pegged at 5.3%. Overall, the RBI continues to be sanguine about inflation.
What about GDP growth? Here, the RBI has hiked the estimated growth for FY23 from 6.8% to 7.0%, in line with the first advance estimates of MOSPI. Clearly, India seems to be reveling in the fact that both IMF and World Bank have projected India to be the fastest growing large economy in the world in FY23 and in FY24. For a growth dependent Indian economy, the Union Budget must have come as a whiff of fresh air. It made outlays of Rs10 trillion for capex and cut fiscal deficit by 50 basis points to 5.9% of GDP for FY24. The enhanced 7.0% GDP growth projection for FY23 is topped up with 6.4% GDP growth projection for FY24. Check the break-up of the FY24 GDP growth quarter-wise. GDP growth is projected at: Q1FY24 at 7.8%, Q2FY24 at 6.2%, Q3FY24 at 7.8% and Q4FY24 at 6.2%.
Key policy shifts announced by RBI, outside MPC ambit
RBI monetary policy once again went beyond monetary numbers to signal a shift at a policy level. Check out these key announcements.
The policy shows confidence in growth and a warning signal to the market not to get too smug about inflation.
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