Vipin Malik is the Chairman & Mentor of Infomerics Ratings and Sankhanath Bandyopadhyay is the Economist of Infomerics Ratings.
The RBI Monetary Policy Committee (MPC) has kept the repo rate unchanged at 6.50 percent in its June monetary policy. However, interestingly this time dissent among the MPC members has increased by 4:2 compared to the previous 5:1, indicating ceteris paribus, possible forthcoming changes in either rate or stance, or both in the next monetary policy. The details will be unfolded when the details pertaining to the monetary policy minutes are published.
Based on the encouraging real GDP growth rate of 8.2 percent in FY 2023-24 as compared to the growth rate of 7.0% in FY 2022-23, the real GDP growth projections have been enhanced upwards by the RBI. Real GDP growth for 2024-25 is projected at 7.2 percent (enhanced from 7.0 percent from the previous projection) with -Q1 at 7.3 percent (enhanced from 7.1 percent earlier); Q2 at 7.2 percent (enhanced from 6.9 percent); Q3 at 7.3 percent (enhanced from 7.0 percent); Q4 at 7.2 percent (enhanced from 7.0 percent).
On the other hand, while admitting that core inflation is reducing and well-range-bound, the RBI has expressed concerns about the volatility of food inflation. The exceptionally hot summer season and low reservoir levels may put stress on the summer crop of vegetables and fruits. The rabi arrivals of pulses and vegetables need to be carefully monitored. Hence, assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 percent with Q1 at 4.9 percent; Q2 at 3.8 percent; Q3 at 4.6 percent; and Q4 at 4.5 percent.
In the near term, liquidity could remain volatile with a move back into deficit in the coming days (impact of excise-related outflows and advance tax payments). However, government spending can support this. In the regulatory front, it is proposed to revise the definition of bulk deposits as ‘Single Rupee term deposits of ₹3 crore and above’ for SCBs (excluding RRBs) and SFBs, this could be to encourage banks to garner greater retail deposits to fund credit growth.
Further on regulatory front, keeping in view the progressive liberalisation under FEMA 1999 and to impart greater operational flexibility to Authorized Dealer (AD) banks, the RBI has decided to rationalise existing guidelines on export and import of goods and services in line with the changing dynamics of cross-border trade transactions globally, which is likely to help in facilitating trade. Given the ongoing global slowdown, trade facilitations are imperative especially in augmenting exportable and enable smooth functioning with the changing dynamics of the international trade pattern. The RBI proposed to set up a Digital Payments Intelligence Platform (DPIP) which will harness advanced technologies to mitigate payment fraud risks. This is also a crucial step in the era of increasing frauds, especially online frauds.
It is interesting to note that the Governor statement highlighted that the monetary policy decision depends on both global and local factors. To quote “There is a view that in matters of monetary policy, the Reserve Bank is guided by the principle of ‘follow the Fed’. I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions. In other words, while we do consider the impact of monetary policy in advanced economies on Indian markets, our actions are primarily determined by domestic growth-inflation conditions and the outlook.”
It is further highlighted that Central banks remain steadfast and data-dependent in their fight against inflation. Some central banks from advanced economies like Switzerland, Sweden, Canada and Euro Area have begun their rate easing cycle during 2024.
On the other hand, market expectations of rate cut by the US Fed, which was higher earlier, have moderated subsequently. Market expectations regarding the timing and pace of interest rate cuts are also changing with incoming data and central bank communication. It seems that going forward, the RBI could resort towards a dovish stance, however, the concern remains regarding food and especially vegetable inflation as well as a clear rate softening stance from the Fed, for which market is eagerly waiting. The hotter than job market, whereas the increase in the nonfarm payroll employment by 272,000 in May’24, and the little change in the unemployment rate has made the Fed’s rate softening stance more challenging.