The Indian economy is set for a potentially stable high growth phase and is well-positioned despite significant risks, according to Shashanka Bhide, a member of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC). Bhide highlighted that the growth in income supporting domestic demand and high levels of investment spending in recent years are key factors sustaining the economy’s momentum.
Sustained Economic Activity Expected
Bhide stated, “In terms of growth momentum and inflation trajectories, the Indian economy is poised for a stable high growth phase. It is also in a strong position in the context of significant risks that are also facing us.” The official estimate for GDP growth in 2023-24 is 8.2%, up from 7% in the previous year. The RBI has projected a GDP growth rate of 7.2% for FY25.
Positive Monsoon Impact
Normal monsoon rainfall is expected to positively impact growth and help reduce food inflation. Bhide noted that global demand conditions must improve to boost external demand for goods and services. Significant capital inflows supporting investment reflect the supply side efficiencies and high growth potential of the economy in terms of both domestic demand and exports.
Inflation Concerns and Projections
Addressing inflation concerns, Bhide identified risks from adverse weather events, global supply chain disruptions due to international conflicts, and the slow recovery of the global economy. He emphasized the importance of reducing food inflation, which has averaged about 8% from January to May 2024. However, overall CPI-based inflation has moderated to below 5% during March-May 2024.
Policy Rate and Inflation Alignment
Bhide remarked, “The prevailing policy rate combined with the gradual decline in inflation rate does mean higher real interest rates, but continued focus on keeping the inflation aligned with the target in a sustained way is important at this point to support growth as well.” The RBI’s MPC left the key interest rate unchanged at 6.5% for the eighth consecutive time in its latest bi-monthly review.
Retail Inflation and Future Projections
The RBI has projected Consumer Price Index (CPI)-based retail inflation at 4.5% for FY25, with quarterly projections of 4.9% in Q1, 3.8% in Q2, 4.6% in Q3, and 4.5% in Q4. Retail inflation stood at 4.75% in May. The RBI’s mandate is to ensure inflation remains at 4% with a margin of 2% on either side, primarily considering CPI in its monetary policy decisions.