“The summer of 2022 is behind us.” This might be one of the most resolute statements of the RBI Governor, Shaktikanta Das. The statement underlines the humongous policy and governmental efforts undertaken to rein in inflation to the current manageable range.
As India beams on the world stage as the fastest-growing major economy, much focus is on the monetary policy to get a sense of the direction going forward. The governor did not disappoint; a widely expected status quo policy was pepped up with a higher than estimated 7% growth rate in FY24 GDP numbers and a steady inflation target of 5.4% for the fiscal year. The overall commentary bordered on a “neutral” stance, reflecting the optimism in the steps taken so far.
Much of the cheeriness comes from the September quarter’s 7.6% GDP growth and the inflation in October, which dipped below 5% for a long time. One may recall the summer of 2022, when the WPI-based inflation peaked to 15.88% in May 2022, owing to the rise in prices of mineral oils, basic metals, chemicals, food, and non-food products. The next two quarters might witness uncertainties in food prices, making headline inflation tick higher in November and December (RBI projected 5.6%). Even though the government has stepped in with supply-side measures for stable cereal prices, international trends may impact the prices of rice and sugar. Among vegetables, onion and tomato prices are showing an upward trend. Data points on Kharif harvest arrivals, the progress in rabi sowing, and the eventual impact of El Nino weather conditions are awaited.
Even though the inflation expectation remains elevated in the next two quarters, the RBI expects a gradual reduction through the first two quarters of FY25, when the inflation may eventually come to its stated target of 4%.
Amid such optimism comes the fragility being witnessed across the global economy, especially due to geo-political hostilities, slow growth in major economies, and the potential for crude prices to firm up. So far, the crude prices have remained benign at around $73–74 a barrel on low demand from China and higher US inventories, besides the inability of the OPEC to reach output cut targets.
However, with Brent showing a marginal uptrend, the scenario may change soon, bringing the pressure back into the RBI’s calculations. As India continues to grow rapidly, a moderation in crude prices, a significant component in logistics, is critical. Similarly, a stable interest rate regime provides the perfect setting for increased investments in the logistics and infrastructure sectors.
Kotak Mahindra Bank Limited
The construction equipment will gain momentum as the government steps on infra spending in Q3 onwards. With the sustained strengthening of manufacturing and construction, topped by a gradual recovery in the rural sector, household consumption will improve further. As the RBI observed, the healthy twin balance sheets, a supply chain normalisation, and the rise in public and private capital expenditure brighten the scenario amid a lowering drag from weak external demand. Services exports remained buoyant during the September quarter, with the net balance under services and remittances helping the country keep its current account deficit manageable.
As of now, GDP growth is hogging the limelight as the momentum in investment demand, along with business and consumer optimism continues to support domestic economic activity. With the cumulative policy rate hikes undertaken so far still percolating their way through the economy, the RBI gets more time to sustain the green shoots across the economy in a bid to support growth, even as it pursues an actively disinflationary policy that begins to anchor inflation expectations.
(This article is authored by Amit Mohan, President and Head – Logistics, Infra, Commercial Vehicles & Construction Equipment Retail Loans, and Working Capital at Kotak Mahindra Bank Limited)
