MPC's Shashanka Bhide sees downside risks to RBI's FY24 growth forecast

Shashanka Bhide, one of the three external members on the Reserve Bank of India's Monetary Policy Committee, thinks India's growth outlook is a mixed picture.

There are downside risks to the Reserve Bank of India's (RBI) GDP growth forecast for 2023-24, Shashanka Bhide, one of the three external members on the Monetary Policy Committee, has said.

"I certainly recognise that there are downside risks to the projections, and we need to take into account this risk," Bhide told Moneycontrol in an interview following the release of the minutes of the April 3-6 meeting of the MPC on April 20.

On April 6, the RBI announced a slight increase in its growth forecast for the current year to 6.5 percent, up 10 basis points from before.

One basis point is one-hundredth of a percentage point.

The growth upgrade by the RBI – driven by a lower crude oil price assumed in the projection models – came even as most economists and multilateral agencies such as the International Monetary Fund are lowering their forecasts for India to below 6 percent. However, Bhide said that even a growth rate of 6.5 percent would represent a "significant drop" from the 7 percent expansion the Indian economy is expected to have posted in 2022-23.

"…the outlook for 2023-24 presents a mixed picture. The resilience of growth momentum in the last two years in the face of adverse conditions is an indication of the potential strengths of the economy. But the prevailing unfavourable external environment is a key impediment," Bhide said.

Policy pivot?

The MPC's shock April 6 decision to leave the repo rate unchanged at 6.5 percent has sparked expectations that the rate hike cycle has come to an end – despite the committee saying in its statement that it would not hesitate to take further action in future meetings and Governor Shaktikanta Das saying the decision was only a pause and not a pivot.

When asked what would constitute a pivot in monetary policy, Bhide said it would be "a rate decline or more broadly, at this juncture, an indication of a future change in the rate path".

But that pivot may be some distance away, with Bhide saying the immediate policy priority was to ensure inflation stayed within the RBI's tolerance band of 2-6 percent for a sustained period, after which inflation would be moved closer to 4 percent in the medium term.

According to Bhide, it is important to maintain the moderation in inflation that was seen in March.

"We should look for a more generalised decline in the price rise across sectors and also that it is not only seasonal in nature," he added.

Data released on April 12 showed Consumer Price Index (CPI) inflation came in at 5.66 percent in March, falling below 6 percent, the upper bound of the central bank's tolerance band, after a gap of two months. Economists expect inflation to fall below 5 percent in April, albeit on a favourable base effect.

The RBI expects CPI inflation to average 5.2 percent in 2023-24, with the quarterly forecasts ranging from 5.1 percent to 5.4 percent.

As far as core inflation is concerned – which eased to 5.8 percent in March from 6.1 percent in February, per Moneycontrol's calculations – Bhide pointed out that some key groups of the CPI such as clothing and footwear continue to post 6 percent-plus inflation rates.

"There may be signs that by now the pass-through of the input price rise may be absorbed in the output sale prices. That would be the key to achieving a lower inflation rate on a durable basis," he told Moneycontrol.

Supply-side risks

Since the MPC’s April 6 decision, below-normal monsoon has emerged as a key risk to inflation. While the India Meteorological Department has predicted a normal monsoon at 96 percent of the Long Period Average (LPA), private forecaster Skymet expects it to be 'below normal' at 94 percent of the LPA.

According to Bhide, an honorary senior advisor at the New Delhi-based National Council of Applied Economic Research, the onset of the monsoon and its course and distribution during the season would be crucial for agricultural operations.

"As reservoirs and water storage would be replenished by the monsoon, monsoon would be crucial," Bhide said.

"I believe that monetary policy would be important when the price shocks become more generalised. There may of course be credit related measures directed at the supply side that the RBI may consider," he added.