RBI Forecasts Lower Inflation and Higher Growth Ahead

The Reserve Bank of India (RBI) decided to keep the key policy rates unchanged in its sixth bi-monthly monetary policy statement for 2022-23 released on February 8th, 2023. The central bank retained its accommodative stance to prioritize economic growth amidst global growth slowdown concerns. But, the Monetary Policy Committee (MPC) stressed its commitment to taming inflation and bringing it within tolerable limits.

Key Highlights of the RBI’s Monetary Policy Decision

The RBI maintained status quo on key policy rates while lowering inflation forecast for the next fiscal year in its latest monetary policy statement. Some of the key highlights are:

• Repo rate unchanged at 6.50%
• Reverse repo rate unchanged at 3.35%
• Marginal Standing Facility (MSF) rate unchanged at 6.25%
• Bank rate unchanged at 6.25%
• Cash reserve ratio (CRR) unchanged at 4%
• GDP growth forecast upgraded to 7% for FY 24 from 6.8%
• Inflation forecast lowered to 4.5% for FY25 from 5%

RBI’s Growth and Inflation Outlook

The RBI revised upward its FY24 growth estimate to 7% while projecting inflation to ease to 4.5% by FY25.

• Retained GDP growth projection for FY23 at 6.8% with quarterly variations
• Revised upward FY24 economic growth forecast to 7% citing improvement in bank credit expansion and overall demand
• Recent softening of inflationary pressures has further boosted resolve to ensure return of inflation to target levels
• Lowered inflation estimate for Q1 FY24 to 5% from 5.2%
• Reduced inflation projection for FY25 to 4.5% from 5%, moving closer to 4% mid-point of inflation target

Key Factors Behind Status Quo on Rates

Global uncertainties, sticky core inflation and volatile commodities prices prompted RBI to keep rates unchanged. Factors in perspective:

• Concerned about global economic outlook amid recession worries
• Global financial conditions could tighten further with equity and currency volatility
• Decided to monitor external developments while prioritizing domestic stability
• Core inflation sticky above 6% despite softening headline retail inflation
• High core inflation limits room to pivot to lower interest rates
• Crude oil and food prices remain risks to near-term inflation trajectory
• Inflation path depends on monsoon distribution in 2023

Analyzing Rate Cut Possibilities

• Tone predominantly hawkish with no stance change hints
• Focus remains on 2-6% inflation target band
• Cuts seem unrealistic in 3-4 reviews unless inflation below 5%

Liquidity Withdrawal Measures

• Increased CRR deposits 50 bps to 4.50% from March 4th
• 50% progressive CRR increase over two years from February 11, 2023
• Could continue intermittently

Full Transmission Needed First

• Would likely wait for full pass-through of past 190 bps hike before cuts
• Reflect tightening in lending rates before next easing cycle

Potential Cut by Q3 FY24

• Could ease only by Q3 FY24 or later if inflation nears mid-point target
• Could shift stance to neutral first
• Effects on Economy

Anchors Inflation Expectations

• Unwavering focus would reinforce credibility
• Also prevents bond yield volatility

Mixed Growth Outlook

• Status quo temporarily means sluggish credit beyond large firms
• INR could depreciate with forex volatility risks
• Sustained public capex vital as stimulus withdrawn

Impacts on Economy

• Indicates strong commitment to anchor inflation expectations while supporting growth
• Hopes to lock-in inflation cooling gains and prevent recurrence of pressures
• Growth impact of high rates needs counter-balancing capex focused fiscal policies
• Rapid rate cuts ruled out for 3-4 months until inflation nears 4% target
• Would remain in inflation fighting mode with status quo on rates

The growth-inflation tradeoff remains contingent on global factors like commodity prices as well as effective transmission of past policy rate hikes. While the RBI’s accommodative stance persists along with ample domestic buffers, its inflation targeting credibility cannot be diluted. Policy normalisation would resume if inflation proves sticky or growth assumes primacy over prices.