It was widely expected that the Monetary Policy Committee (MPC) would leave the policy rate unchanged at 6.5% and that there would be no change in the ‘withdrawal of accommodation’ stance when it concluded its deliberations on Friday. One understands why the MPC is in no hurry to cut the repo rate at this point when food inflation spurts every now and then and when crude oil prices have crossed the $90 per barrel mark. Moreover, headline GDP numbers have been very strong, giving the Reserve Bank of India’s (RBI’s) abundant room to fight inflation.
While the RBI forecasts that inflation will taper off to 4.5% in FY25, the fact is that uncertainties, in terms of geopolitical tensions, persist. Moreover, while Fed Chair Jerome Powell has indicated rates would be cut sometime this year, it’s not clear how soon these cuts will materialise. While the RBI may choose not to acknowledge this, there has undoubtedly been some degree of co-movement between the Fed’s moves and those of India’s central bank.
Again, with Deputy Governor Michael Patra observing that it isn’t really material to consider the level of real interest rates when inflation is still way above the 4% target, it would appear that a cut in the policy rate would not take place until the MPC is convinced inflation has been durably tamed. Also, the caution on both global and local supply-side shocks suggests that the cuts in the first phase—possibly starting in August or October—could be just about 50 basis points. The RBI clearly believes it would be prudent to wait to see how the monsoon plays out and ahead of that whether the above-normal temperatures in the coming months impact the production of food crops.
Also Read Pakistan’s Kashmir Over- Obsession is Suicidal The MV Ruen Episode: Payoffs from Investing in Naval and Air Power Tax burden on a minority: ITR filing has improved, but how long can less than 3% support the rest? The new govt must go in for a speedy rollout of the four codes passed in Parliament While the policy rate may be at 6.5%, the transmission of the cumulative hikes in the policy rates is as yet incomplete. So lending rates, which are already elevated, could trend up further as banks remain compelled to pay out more to customers in the scramble for deposits. The problem is that if the cost of funds remains high, it could continue to limit the revival in private capital expenditure. Right now, it is the government that is investing and that may not be enough to drive growth. While the GDP may have grown at 8.4% y-o-y in Q3FY24, the growth in the GVA was just 6.5%. Economists have attributed the slower rise in the GVA to a curtailing of spends on subsidies. Critically, on the demand side, the increase in private consumption—which accounts for 57% of the economy—was anemic. It inched up to 3.5% y-o-y in Q3 from an even slower 2.4%y-o-y in Q2.The point is that the GDP is being driven up largely investment whereas consumption is very weak. There too, the jump in the gross fixed capital formation of 10.6% y-o-y in Q3came a weak base.
While the drag from net exports eased in Q3FY24, from -1.8 percentage points to -1.2 percentage points, the fact is export growth moderated. This is important given the slowdown in the global economy is expected to persist. Locally, sales of commercial vehicles and tractors continue to be underwhelming. It is, therefore, not surprising at all the RBI’s growth forecast for FY25 was left unchanged at 7%. Unless interest rates come down small enterprises will suffer and private capex won’t pick up meaningfully.
It was widely expected that the Monetary Policy Committee (MPC) would leave the policy rate unchanged at 6.5% and that there would be no change in the ‘withdrawal of accommodation’ stance when it concluded its deliberations on Friday. One understands why the MPC is in no hurry to cut the repo rate at this point when food inflation spurts every now and then and when crude oil prices have crossed the $90 per barrel mark. Moreover, headline GDP numbers have been very strong, giving the Reserve Bank of India’s (RBI’s) abundant room to fight inflation.
While the RBI forecasts that inflation will taper off to 4.5% in FY25, the fact is that uncertainties, in terms of geopolitical tensions, persist. Moreover, while Fed Chair Jerome Powell has indicated rates would be cut sometime this year, it’s not clear how soon these cuts will materialise. While the RBI may choose not to acknowledge this, there has undoubtedly been some degree of co-movement between the Fed’s moves and those of India’s central bank.
Again, with Deputy Governor Michael Patra observing that it isn’t really material to consider the level of real interest rates when inflation is still way above the 4% target, it would appear that a cut in the policy rate would not take place until the MPC is convinced inflation has been durably tamed. Also, the caution on both global and local supply-side shocks suggests that the cuts in the first phase—possibly starting in August or October—could be just about 50 basis points. The RBI clearly believes it would be prudent to wait to see how the monsoon plays out and ahead of that whether the above-normal temperatures in the coming months impact the production of food crops.
While the policy rate may be at 6.5%, the transmission of the cumulative hikes in the policy rates is as yet incomplete. So lending rates, which are already elevated, could trend up further as banks remain compelled to pay out more to customers in the scramble for deposits. The problem is that if the cost of funds remains high, it could continue to limit the revival in private capital expenditure. Right now, it is the government that is investing and that may not be enough to drive growth. While the GDP may have grown at 8.4% y-o-y in Q3FY24, the growth in the GVA was just 6.5%. Economists have attributed the slower rise in the GVA to a curtailing of spends on subsidies. Critically, on the demand side, the increase in private consumption—which accounts for 57% of the economy—was anemic. It inched up to 3.5% y-o-y in Q3 from an even slower 2.4%y-o-y in Q2.The point is that the GDP is being driven up largely investment whereas consumption is very weak. There too, the jump in the gross fixed capital formation of 10.6% y-o-y in Q3came a weak base.
While the drag from net exports eased in Q3FY24, from -1.8 percentage points to -1.2 percentage points, the fact is export growth moderated. This is important given the slowdown in the global economy is expected to persist. Locally, sales of commercial vehicles and tractors continue to be underwhelming. It is, therefore, not surprising at all the RBI’s growth forecast for FY25 was left unchanged at 7%. Unless interest rates come down small enterprises will suffer and private capex won’t pick up meaningfully.
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Playing it safe
21
1
07.04.2024
It was widely expected that the Monetary Policy Committee (MPC) would leave the policy rate unchanged at 6.5% and that there would be no change in the ‘withdrawal of accommodation’ stance when it concluded its deliberations on Friday. One understands why the MPC is in no hurry to cut the repo rate at this point when food inflation spurts every now and then and when crude oil prices have crossed the $90 per barrel mark. Moreover, headline GDP numbers have been very strong, giving the Reserve Bank of India’s (RBI’s) abundant room to fight inflation.
While the RBI forecasts that inflation will taper off to 4.5% in FY25, the fact is that uncertainties, in terms of geopolitical tensions, persist. Moreover, while Fed Chair Jerome Powell has indicated rates would be cut sometime this year, it’s not clear how soon these cuts will materialise. While the RBI may choose not to acknowledge this, there has undoubtedly been some degree of co-movement between the Fed’s moves and those of India’s central bank.
Again, with Deputy Governor Michael Patra observing that it isn’t really material to consider the level of real interest rates when inflation is still way above the 4% target, it would appear that a cut in the policy rate would not take place until the MPC is convinced inflation has been durably tamed. Also, the caution on both global and local supply-side shocks suggests that the cuts in the first phase—possibly starting in August or October—could be just about 50 basis points. The RBI clearly believes it would be prudent to wait to see how the monsoon plays out and ahead of that whether the above-normal temperatures in the coming months impact the production of food crops.
Also Read Pakistan’s Kashmir Over- Obsession is........
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