– By Srikanth Subramanian
RBI on expected lines kept repo rate unchanged at 6.5% and maintained withdrawal of accommodation stance for the third consecutive time in this financial year. Growth projections were also maintained at 6.5% for FY24 with domestic economic activities holding up well with strong IIP numbers in the manufacturing and services sector. Compared to global economies that have imposed challenges w.r.t inflation, growth, high debt levels, India is relatively better placed and has been able to withstand external headwinds on the economic growth front.
The forex reserves levels are over $600 billion, which will help provide cushion in case of any external issues and the rupee has relatively remained stable. One needs to keep in mind that in June policy, RBI had lowered its inflation projections for FY24 to 5.1% from 5.4%. Now, Inflation projections for FY24 has been again revised upwards to 5.4% from 5.1% on the back of higher vegetable, cereal and pulses in recent months due to erratic monsoon and rising crude prices following supply cuts by Saudi Arabia and Russia, both of which could lead to a substantial increase in headline inflation in the near term. Food inflation had increased to 4.49% in June from 2.96% in May. This pushed the June CPI numbers to 4.81% from 4.31% in May. Brent crude prices have gone up from $74 to $86 levels in a months’ time. This is going to impact inflation levels both in India and globally. India core inflation (excluding food and fuel) although, has come down by over 1% from peak levels seen in January 2023.
It is evident that RBI’s actions are going to be the basis of how economic data are spanning out and what could be expected going forward. The July –September 2023 CPI inflation forecast has been revised higher to 6.2% vs 5.2% set in the June policy. Uncertainties around domestic food price outlook due to sudden weather events and possible El Nino conditions in August and beyond would be keenly observed by RBI over the course of next few months, even though there has been seen some improvement in progress of the monsoon which have brightened the prospects of Kharif crops. What came out of the box was the temporary incremental CRR of 10% of NDTL which would be required to be maintained to drain excess liquidity in the banking system. This was announced after over 88% of 2000 notes worth Rs 3.14 lakh crore had returned to the banking system by 31 July 2023. This might inch up the yields on the short end of the yield curve.
Overall, RBI and the governor seem to be focused on bringing down inflation to 4% target levels and the future course of action will be decided based on how data points come out over the next few months.
(Srikanth Subramanian is the CEO of Kotak Cherry.)
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