For the seventh consecutive review, the Reserve Bank of India (RBI) monetary policy committee kept the key lending rates unchanged, maintaining its steadfast focus on bringing the inflation to its targeted levels, However, the Governor’s commentary exuded high optimism with economic positives being galore which one may construe as a gradual and calibrated groundwork towards eventual rate cuts.
Overall, the RBI’s policy stance reflects a balanced approach, given the domestic and external circumstances. Despite existing challenges, the economy’s underlying resilience, coupled with prudent policy measures, inspires confidence in its ability to navigate future uncertainties. The robust growth momentum suggests that there is no arguable need – at least for the moment – to reduce rates. The Governor emphasised that the growth outlook provides ample elbow room for the central bank to remain steadfastly committed to maintaining price stability.
In its first review in FY25, the central bank maintained the stance as ‘withdrawal of accommodation’, amidst the backdrop of positive economic indicators, including a robust GDP growth, increasing consumption in both rural and urban India, a better-than expected investment cycle and the forecast of an above-average monsoon. Though the headline inflation eased to around 5 per cent in January and February 2024 – after peaking to the stubborn inflation 7.8 per cent in April 2022, the RBI is wary of the periodic spikes – first in vegetables and then in grains and pulses – that had wreaked major uncertainty into its inflation battle.
With the Governor likening the stubborn inflation to an elephant that is now retreating to the forest, alluding to the broader success in combating the inflation, like all central banks, it has also conceded that the last mile inflation fight remains as challenging. Thus, despite the key variant, monsoon turning normal – following the transition from El Niño to La Niña conditions – the central bank will keep an actively disinflationary policy to ensure the anchoring of inflation expectations without derailing the growth. The CPI inflation is now forecast at 4.5 per cent for this fiscal year, contingent upon a normal monsoon.
Strong underlying growth signals: In fact, inflation with its many moving parts – both domestic and international – seems the major outlier in the bright domestic economic outlook. For example, consumption – both rural and urban consumption – continues to propel the economy forward. Others like high GST collections – estimated to be Rs 20 lakh crore in FY 24, the upturn in the private capex cycle – now even more broad-based, the rising government capex, higher capacity utilisation and a far more optimistic business community firmly confirm this trend. The performance of the core sector also augurs well for the investment cycle. Thus, the RBI’s forecast of a 7 per cent for Fy25 may seem moderate after the expectation of 7.6 per cent for FY24.
President, Logistics & Infrastructure
Kotak Mahindra Bank and Director
Kotak Mahindra Prime.
Also, with the manufacturing PMI hitting a 16-year high in March this year, FPI inflows making a significant turnaround, CAD becoming manageable, the Indian rupee becoming one of the most stable global currencies, Services PMI showing a healthy expansion, and forex reserves touching all-time highs, the overall sentiment is fairly upbeat.
Here, one of the key metrics to monitor includes the performance of the logistics sector, responsible for transporting around 70 per cent of goods ranging from capital goods to fast-moving consumer goods (FMCG), cement, and steel etc. This sector’s health serves as a crucial gauge to understand the direction and performance of the broader economy.
Lurking risks: However, there are certain risks on the horizon that warrant constant attention. While the expectation of a normal monsoon is encouraging, the threat of heat waves looms as a potential risk factor and could lead to inflationary effect on food, energy and power generation. Additionally, unstable global energy prices, increase in geo-political tensions and unexpected supply side disruptions could “import’ inflation into domestic prices, negating some of the gains achieved through an efficient monetary policy implementation.
Though the RBI expects the headline inflation to come the closest to its target – at 3.8 per cent in Q2 FY25, it is anticipating the yearly inflation to be above 4.5 per cent. Since the spiny 2022 scenario, we have come a long way to tame the inflation to sub-5 per cent levels without denting the high economic growth. But as the Governor said, if we can competently manage the supply side shocks to our food prices, we may have a long period of price stability on an enduring basis, supporting a sustained period of high growth. We should be there fully by the August policy review when we can expect a rate moderation.
