The decision was expectedly non-unanimous, with two of the six MPC members voting against the rate hike. That these two external members would favour a pause in the February 2023 meeting was clear from their commentary as per the minutes of the December 2022 policy meeting. The committee has reiterated that “further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and, thereby, strengthen medium-term growth prospects” in the policy document. The decision on the stance was also non-unanimous, taken by a vote of 4-2.

MPC has cut its CPI inflation projections for Q4 FY2023 to 5.7% from 5.9% earlier; this, along with the significant undershooting in Q3 FY2023 vs its estimates, led to the paring of its FY2023 forecast to 6.5% from 6.7% earlier. The committee has kept its inflation projections for Q1 FY2024 and Q2 FY2024 unchanged at 5.0% and 5.4%, respectively, while issuing estimates for Q3 and Q4 of the next fiscal at 5.4% and 5.6%, respectively.

Following 250 bps of repo rate hikes, MPC expects the average Consumer Price Index inflation to moderate by 120 bps to 5.3% in FY2024, assuming a normal monsoon during the year. It has highlighted that elevated core inflation is expected to remain a concern, and the inflation outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude oil prices. Moreover, global growth prospects have improved somewhat, which could prevent a meaningful further softening in commodity prices.

The committee’s CPI inflation projection for FY2024 is slightly higher than our estimate of 5.2%. However, we expect the H2 FY2024 prints to be softer, based on our assessment of a relatively weaker domestic growth during this period. While vegetable price shocks can never be discounted, we are hopeful that healthy reservoir levels, in seasonally adjusted terms, offer insurance against a delayed start to the monsoon season. Nevertheless, we concur with MPC’s concerns around elevated core inflation, particularly in the near term, given the robust demand for services.

On growth, MPC’s commentary and projections were optimistic, based on domestic factors, including the strong prospects for agriculture, rebound in contact intensive services and discretionary spending, business and consumer confidence optimism, healthy credit growth and the government’s capex thrust. This has manifested into its growth projections for FY2024, with the real GDP growth estimate at 6.4%, largely in line with the forecast of 6.5% as per the Economic Survey.

We concur that domestic consumption and investment demand will remain buoyant in FY2024 amid the external headwinds. In particular, the Union Budget FY2024 has penciled in a sharp growth in growth-supportive capital spending. The pace with which this unfolds, especially whether the state governments can step up their offtake of the enhanced allocation for the interest-free capex loan, will determine the fiscal impulse to growth. Overall, we are slightly circumspect and expect Gross Domestic Product growth to moderate to 6.0% in FY2024 from the NSO’s first advance estimate of 7.0% in FY2023.

Interestingly, MPC has hiked its GDP growth projection for Q1 FY2024 to 7.8% from 7.1% and for Q2 FY2024 to 6.2% from 5.9%. Thereafter, it expects growth to be moderate to 6.0% in Q3 FY2024 and 5.8% in Q4 FY2024. The outlook for H2 FY2024 is higher than our projections of 5.0-5.5% for that period, albeit similar to our assessment of the potential GDP growth for the Indian economy. This will likely have fed into the committee's higher-than-expected inflation projection for that period.

Given the near-6% growth projection and 5.5% inflation forecast for H2 FY2024, the committee has kept the window open for further policy tightening to reiterate its continuing vigilance. We expect future policy action to be data-dependent, especially focusing on whether the CPI inflation evolves around the projected trajectory.

With the tone of the policy document being somewhat hawkish, the yield for the 10-year government security rose modestly after the policy announcement. Now that the uncertainty related to the central government borrowings for FY2024 is out of the way, we foresee the yield for the newly issued benchmark 07.26 GS 2033 to range between 7.25-7.5% in the immediate term.

Aditi Nayar is chief economist, head-research and outreach, ICRA Ltd

The views expressed are personal