RBI cuts inflation projection for FY24, retains 6.5% GDP growth forecast

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday reduced its inflation forecast for 2023-24 to 5.1% from 5.2% projected earlier.

Assuming a normal monsoon, CPI inflation in Q1 is projected at 4.6%, Q2 at 5.2%, Q3 at 5.4% and Q4 at 5.2%, the MPC says, adding it has decided to remain focused on 'withdrawal of accommodation' to ensure that inflation progressively aligns with the target while supporting growth.

"The headline inflation trajectory is likely to be shaped by food price dynamics. Wheat prices could see some correction on robust mandi arrivals and procurement. Milk prices, on the other hand, are likely to remain under pressure due to supply shortfalls and high fodder costs," the MPC says.

The forecast of a normal south-west monsoon by the India Meteorological Department (IMD) augurs well for kharif crops, however, the spatial and temporal distribution of the monsoon would need to be closely monitored to assess the prospects for agricultural production, it says.

Retail inflation, measured by the All-India Consumer Price Index (CPI), hit an 18-month low of 4.7% in April compared with 5.66% in March and 6.4% in February on the back of favourable base effects.

Food group inflation eased, with moderation in cereals, eggs, milk, fruits, meat and fish, spices and prepared meals inflation and deepening of deflation in edible oils. In the fuel group, inflation in LPG and firewood and chips prices fell and kerosene prices slipped into deflation. Core inflation (i.e., CPI inflation excluding food and fuel) dipped, driven down by clothing and footwear, household goods and services, health, transport and communication, personal care and effects and recreation and amusement sub-groups.

RBI retains GDP growth forecast

The MPC retained its gross domestic product (GDP) forecast for the financial year 2023-24 at 6.5%. "The higher rabi crop production in 2022-23, the expected normal monsoon, and the sustained buoyancy in services should support private consumption and overall economic activity in the current year. The government's thrust on capital expenditure, moderation in commodity prices and robust credit growth are expected to nurture investment activity. Weak external demand, geoeconomic fragmentation, and protracted geopolitical tensions, however, pose risks to the outlook," RBI's rate-setting panel says.

Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.5% with Q1 at 8%, Q2 at 6.5%, Q3 at 6%, and Q4 at 5.7%.

This comes two days after the World Bank said India will remain the fastest-growing economy in terms of both aggregate and per capita GDP of the largest emerging market and developing economies. The global financial institution retained its April forecast for India's GDP growth forecast at 6.3% for the financial year 2023-24, a 0.3 percentage point downward revision from January. "This slowdown is attributed to private consumption being constrained by high inflation and rising borrowing costs, while government consumption is impacted by fiscal consolidation," the World Bank said in its Global Economic Prospects.

The World Bank expects India's GDP to grow at 6.4% in FY25 and 6.5% in FY26. India's growth in early 2023 remained below what it achieved in the decade before the pandemic as higher prices and rising borrowing costs weighed on private consumption, it added.