RBI Monetary Policy Expectations: Changes To CPI, GDP Growth Projections Unlikely

The Reserve Bank of India is unlikely to tinker with projections for consumer price-indexed inflation and GDP growth in the upcoming policy as it awaits more data, according to a person at the central bank with knowledge of the matter.

The RBI has projected consumer inflation at 5.3% for fiscal 2023–24 as it awaits cues from monsoon trends and external factors like crude oil production, the person said on the condition of anonymity.

If statistical adjustments, including conversations with the National Statistical Office on the free food grain programme, play out positively, then the actual consumer price index may be lower than projected, the person said. But it may not be appropriate to lower estimates just yet with so many variables still unknown, the person said.

According to the RBI's projections, the CPI is seen at 5% in April–June, 5.4% in July–September, 5.4% in October–December, and 5.6% in January–March 2024, with the risks evenly balanced.

The RBI and the NSO had discussed the need to find a better methodology to handle anomalies in data, such as the free food grain programme, the person quoted above said.

In January and February, the CPI inflation was at 6.52% and 6.44%, respectively, well above the 5.72% in December.

This was largely on account of the NSO taking out the free food grain programme from the calculations and redistributing its weight across all other CPI constituents, according to the person quoted above. However, as these constituents had an upward bias, the methodology led to a higher CPI print.

The conversation between the RBI and the NSO is on in this regard; there is a need to ensure the CPI prints reflect rises or falls in inflation accurately, the person said.

GDP Growth Estimates

The RBI is also expected to maintain its growth forecast of 6.4% for fiscal 2024 when it announces its latest projections along with the Monetary Policy Committee's decision on Thursday. The RBI will stick to a 6.4% GDP growth forecast as there is no case to revisit that projection yet, the person quoted earlier said.

According to the February policy, the RBI estimates the gross domestic product will grow 6.4% for 2023–24. It estimates that the April–June GDP growth will be 7.8%, with July–September at 6.2%, October–December at 6.0%, and 5.8% for January–March 2024. The risks are broadly balanced, with the RBI flagging the pickup in domestic business activity and credit growth and the revival in demand in constant-intensive sectors as positives. However, it mentioned the slowdown in the global economy and its impact on exports as a downside risk.

The World Bank and the Asian Development Bank lowered their 2023–24 GDP projections for India on Tuesday. According to the World Bank, India's GDP is now expected to grow at 6.3%, down from the 6.6% it had projected in December. The ADB has reduced its GDP growth projection to 6.4%, sharply lower than its previous estimate of 7.2%.

The GDP and CPI projections from the RBI are central to the MPC's deliberations on future monetary policy actions. This is especially true for the CPI, as the inflation-targeting mandate of the MPC specifically states that retail inflation must be maintained in a 2–6% band, with 4% as the mid-point.

In 2022, when inflation exceeded the upper band of 6% for three consecutive quarters, the RBI had to write a letter to the government explaining the failure to stick to the mandate.