RBI monetary policy: Report pegs FY23's economic growth at 7.8%

Survey shows inflation to soften further

The monetary policy report of the Reserve Bank of India (RBI) has pegged economic growth at 7.8 per cent for the next financial year (FY23), assuming normal monsoon and full vaccination against Covid-19.
 
“For 2022-23, the structural model estimates indicate real GDP growth at 7.8 per cent, with quarterly growth rates in the range of 5.0-17.2 per cent, assuming restoration of supply chains, a normal monsoon, no major exogenous or policy shocks, and full vaccination,” said the report, which is published twice a year — in April and October. 
 
While announcing the review of the monetary policy on Friday, the six-member monetary policy committee of the RBI retained the growth forecast for FY22 at 9.5 per cent, while CPI inflation projection was revised downward, from 5.7 per cent to 5.3 per cent.

 

Here are 10 key takeaways from the report:
 
Growth

• Economic activity is normalising since June 2021, with the second wave ebbing, restrictions relaxing, and vaccination improving. Urban demand is likely to accelerate with the release of pent-up demand

• The government’s focus on capital expenditure and continued reform push, apart from large foreign direct investment flows, provide a conducive environment for investment activity. Signs of increase in investment pipeline in the rest of 2021-22 and in the coming year

• Professional forecasters survey sees real GDP growth moving from 20.1 per cent in Q1 of 2021-22 to 5.9 per cent in Q4; Seen at 13.1 per cent in Q1 of 2022-23 due to base effects and 6.1 per cent in Q2

Inflation

• Median inflation expectations of urban households for three months and one-year ahead fell 50 basis points (bps) and 60 bps, respectively, in the September 2021 round of the RBI’s survey

• Manufacturing firms polled in the July-September round of industrial outlook survey expect the cost of raw materials and selling prices to rise further in Q3 of 2021-22 

• Upside risks emanate from persistence of supply chain disruptions, further hardening of global commodity prices, especially that of crude oil. Downside risks arise from an earlier-than-expected mending of supply chain disruptions; the persistence of weak demand and slack in the economy

Liquidity conditions

• Money market rates consistently traded below the reverse repo rate; the weighted average call rate — the operating target of monetary policy — traded 17 bps below the floor of the corridor on an average during the first half of FY22

• Riding on the surplus liquidity conditions, commercial paper (CP) issuances increased substantially to Rs 10.1 trillion during the first half of FY22, compared to Rs 7.9 trillion during the same period of the previous year. CP rates generally traded above the reverse repo rate, with an average spread of 46 bps during the first half

External environment

• Crude oil prices turned volatile from the second week of July; Dollar strengthened on the expectation of a US taper. Emerging market currencies depreciated after peaking in the second week of June, mainly triggered by retrenchment of capital flows

• If crude oil prices are 10 per cent above the baseline, domestic inflation could be higher by 30 bps and growth weaker by around 20 bps over the baseline. A 5 per cent depreciation of rupee from the baseline could increase domestic inflation by up to 20 bps, while GDP growth could be higher by 15 bps through a boost to exports