RBI has not become a laggard of other economies, the country is benefiting from the policies made differently

Today all the countries of the world are paying less attention to the agenda of economic development and are paying more attention to efforts to control inflation. Although full attention should be paid to improving the means of supply to control inflation, but with the aim of reducing the demand for products in the market, all the countries are found to be continuously increasing the interest rates only. Continuous increase in interest rates not only adversely affects the availability of finance but also increases the cost of finance, which reduces the demand for products in the market, stagnates the production activities, adversely affects the profitability of the banks. It starts affecting and employment opportunities start decreasing. Overall, the entire economic cycle itself starts getting affected adversely. Despite adverse circumstances, many developed countries (especially America and European countries) are still increasing the interest rates. But, the Reserve Bank of India has taken a different decision in this context.

From August 8, 2023 to August 10, 2023, the meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India has been held and in this meeting it has been decided to keep the repo rate unchanged at 6.50 percent, that is, there will be no increase in it for the third time in a row. Has not been done. However, in India too, once again the pressure on retail inflation is being felt and this is happening due to the recent rise in food prices. Retail inflation in the country has been marginally higher, especially due to higher prices of vegetables, eggs, meat, fish, cereals, pulses and spices. But, the cumulative southwest monsoon rainfall up to 9 August 2023 was similar to the long term average, although the temporal and spatial distribution has been uneven. Despite this, the total area sown to kharif crops till August 4, 2023 has been 0.4 per cent higher than a year ago. Therefore, as soon as the availability of these food items increases in the market after the monsoon season, the prices of these items will start coming down. Anyway, the rate of inflation of food items can be reduced only by increasing the availability of these items. Food based inflation rate cannot be brought down by increasing the interest rates, because no matter how expensive the food items become, the common citizen will have to buy the items of the category of essential needs. Therefore, the Reserve Bank of India has taken a right decision not to increase the interest rate. Also, this decision of the Reserve Bank of India is being considered in line with achieving the medium term target of 4 percent while keeping the consumer price index (CPI) inflation in the range of +/- 2 percent while supporting growth. However, due to the continuous increase in interest rates by other countries of the world, there must have been pressure on the Reserve Bank of India to increase the interest rate, but with the aim of maintaining the economic conditions of India and the economic growth rate of the country. No increase in interest rates has been announced.

Due to not increasing the interest rates further in India, there is momentum in the economic development activities in the country. Otherwise, the 2023 economic growth forecast for many other countries globally has been downgraded by the World Bank, International Monetary Fund and other financial institutions. The Index of Industrial Production (IIP) in India grew by 5.2 per cent in May, while the output of core industries grew by 8.2 per cent in June. Among the high-frequency indicators, e-way bill and toll collections have shown strong growth in June-July, while rail freight traffic and port traffic have recovered in July 2023 from lows in June 2023. The Composite Purchasing Managers’ Index (PMI) has reached a 13-year high in July.

Similarly, urban demand in India remains strong on the back of domestic air passenger traffic and domestic credit continues to show double-digit growth. However, there has been some moderation in the growth of passenger vehicle sales. In terms of rural demand conditions, tractor sales have improved in June while two-wheeler sales have shown some moderation. Strong growth has been registered in cement production and steel consumption. The expansionary situation in the import and production of capital goods has continued. Merchandise exports and non-oil non-gold imports in June 2023 remain in contraction territory.

According to the Reserve Bank of India’s estimate for the financial year 2023-24, the retail price index based inflation rate in India will be 5.4 percent. It is estimated to be 6.2 percent in the second quarter, 5.7 percent in the third quarter and 5.2 percent in the fourth quarter. The CPI inflation for the first quarter of the financial year 2024-25 is estimated at 5.2 per cent. Similarly, the Reserve Bank of India estimates that going ahead, domestic consumption should be supported by kharif sowing and improvement in rural incomes, uptick in various activities in the services sector and consumer optimism. Strong balance sheets of banks and corporates, normalization of supply chains, trade optimism and robust government capital expenditure are amenable to renewal of the capital expenditure cycle, which is showing signs of diversification. However, global headwinds are also likely to persist due to weak global demand, volatility in global financial markets, geo-political tensions and geo-economic fragmentation. Keeping all the factors mentioned above in mind, according to the estimates of the Reserve Bank of India, India’s GDP will register a growth of 6.5 percent during the financial year 2023-24. 8.0 percent in its first quarter; 6.5 percent in the second quarter; 6.0 percent in the third quarter; and is projected to remain at 5.7 percent in the fourth quarter. The real GDP growth rate for the first quarter of the financial year 2024-25 is estimated at 6.6 percent.

Thus, maintaining a balance in interest rates seems to be succeeding in maintaining a strong rate of economic growth in India. On the other hand, since interest rates are being increased continuously in other countries of the world, due to which the rate of economic development in these countries is also seen decreasing. However, now the Reserve Bank of India should also consider reducing the interest rates in India.

– Prahlad Sabnani

Retired Deputy General Manager,

state Bank of India