In August 2023 meeting, RBI’s Monetary Policy Committee (MPC) decided to maintain the repo rate at 6.5% and retained its policy stance. MPC decided to overlook the inflationary surge caused by the vegetables price shock, given its likely short-term nature. However, the Governor indicated that the need for action might arise if inflation shows signs of persistence. RBI also announced a 10% incremental CRR to absorb surplus liquidity in the system.

RBI revised the inflation trajectory substantially upwards and projected an average inflation of 5.4% YoY in FY24. The spike in vegetable prices, led by tomatoes, would exert sizeable upward pressure on the near-term headline inflation trajectory. Vegetable prices, however, are likely to correct with fresh market arrivals. There has been a significant improvement in the progress of monsoon and kharif sowing in July, but uneven rainfall distribution warrants careful monitoring. A possible El Niño event and upward pressures on global food prices due to geopolitical hostilities also pose upside risks.

RBI retains FY24 real GDP growth at 6.5% YoY. Recovery in kharif sowing and rural incomes, the buoyancy in services and consumer optimism should support household consumption. Healthy balance sheets of banks and corporates, supply chain normalization, business optimism and robust government capital expenditure are favorable for a renewal of the capex cycle which is showing signs of getting broad-based. However, headwinds from weak global demand, volatility in global financial markets, geopolitical tensions and geo-economic fragmentation pose risks to the outlook.

RBI expected to opt for a long pause and remain in a ‘wait and watch’ mode to assess the complete impact of the uneven monsoon on food inflation. Liquidity conditions to tighten on account of incremental CRR (expected impact above ₹ 1 tn) and festive currency demand.

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