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India’s RBI may cut rates by 75 bps in 2024 from August

RBI may go for rate cuts from Aug’24 if the Fed goes for the same from Jun’24, everything being equal; also by then India’s CPI may dip toward 4% on a sustainable basis

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On 8^th December, India’s Central Bank RBI held its benchmark policy repo at 6.5% for the 5^th consecutive meeting to ensure inflation (CPI) further eased towards +4.0 targets, while supporting GDP growth. Although, India's annual inflation (CPI) slowed to a four-month low of 4.87% in October due to a slowdown in housing and clothing & footwear prices, RBI Governor Das warned about the possibility of accelerating inflation in November and December due to food price pressures, which came true later as in November, CPI jumped +0.54% sequentially to +5.55% annual reading.

RBI maintained India’s inflation (CPI) projection for FY24 at 5.4% with +5.6% for Q3FY24 and +5.2% in Q4FY24. India’s headline CPI was around +4.7% in Q1FY24 and +6.4% in Q2FY24. RBI revised the economic (real GDP) growth forecast for FY24 to +7.0% from earlier +6.5% after blockbuster growth of +7.6% in Q2FY24 and +7.8% in Q1FY24. RBI now sees India’s real GDP growth of +6.5% for Q3FY24 and +6.0% for Q4FY24.

Full text of RBI Monetary Policy statement: 8^th December’2023

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 8, 2023) decided to:

Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent.

The standing deposit facility (SDF) rate remains unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

Assessment and Outlook

Global growth is slowing at a divergent pace across economies. Inflation continues to ebb though it remains above target with underlying inflationary pressures staying relatively stubborn. Market sentiments have improved since the last MPC meeting – sovereign bond yields have declined, the US dollar has depreciated, and global equity markets have strengthened. Emerging market economies (EMEs) continue to face volatile capital flows.

Domestic economic activity is exhibiting resilience. Real gross domestic product (GDP) grew year-on-year (y-o-y) by 7.6 percent in Q2 2023-24, underpinned by robust investment and government consumption, which cushioned the drag from net external demand. On the supply side, gross value added (GVA) rose by 7.4 percent in Q2, driven by buoyant manufacturing and construction activities.

Continued strengthening of manufacturing activity, buoyancy in construction, and gradual recovery in the rural sector are expected to brighten the prospects of household consumption. Healthy balance sheets of banks and corporates, supply chain normalization, improving business optimism, and a rise in public and private capex should bolster investment going forward.

With improvement in exports, the drag from external demand is expected to moderate. Headwinds from the geopolitical turmoil, volatility in international financial markets, and geo-economics fragmentation pose risks to the outlook.

Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 7.0 percent with Q3 at 6.5 percent; and Q4 at 6.0 percent. Real GDP growth for Q1 2024-25 is projected at 6.7 percent; Q2 at 6.5 percent; and Q3 at 6.4 percent. The risks are evenly balanced.

CPI headline inflation fell by about 2 percentage points since the last meeting of the MPC to 4.9 percent in October 2023 on sharp correction in prices of certain vegetables, deflation in fuel, and a broad-based moderation in core inflation (CPI inflation excluding food and fuel).

Uncertainties in food prices along with unfavorable base effects are likely to lead to a pick-up in headline inflation in November-December. Kharif harvest arrivals and progress in Rabi sowing together with El Niño weather conditions need to be monitored. Adequate buffer stocks for cereals and a sharp moderation in international food prices, along with pro-active supply-side interventions by the Government may keep these food price pressures under check.

Crude oil prices may remain volatile. Early results from the firms polled in the Reserve Bank’s enterprise surveys indicate softer growth in input costs and selling prices for the manufacturing firms in Q4 relative to the previous quarter, while price pressures persist for services and infrastructure firms.

Taking into account these factors, CPI inflation is projected at 5.4 percent for 2023-24, with Q3 at 5.6 percent; and Q4 at 5.2 percent. Assuming a normal monsoon next year, CPI inflation for Q1 2024 -25 is projected at 5.2 percent; Q2 at 4.0 percent; and Q3 at 4.7 percent. The risks are evenly balanced.

The MPC observed that recurring food price shocks are impeding the ongoing disinflation process. Core disinflation has been steady, indicative of the impact of past monetary policy actions. Headline inflation, however, remains volatile, with possible implications for the anchoring of expectations. Domestic food inflation unpredictability and volatility in crude oil prices and financial markets in an uncertain international environment pose risks to the inflation outlook. The path of disinflation needs to be sustained. The MPC will carefully monitor any signs of generalization of food price pressures which can fritter away the gains in easing of core inflation.

On the growth front, improved momentum in investment demand along with business and consumer optimism would support domestic economic activity and ease supply constraints. As the cumulative policy repo rate hike is still working its way through the economy, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting, but with preparedness to undertake appropriate and timely policy actions, should the situation so warrant.

Monetary policy must continue to be actively disinflationary to ensure the anchoring of inflation expectations and fuller transmission. The MPC will remain resolute in its commitment to aligning inflation to the target. The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

All members of the MPC – Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das – unanimously voted to keep the policy repo rate unchanged at 6.50 per cent.

Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth. Prof. Jayanth R. Varma expressed reservations on this part of the resolution.

The minutes of the MPC’s meeting will be published on December 22, 2023.

The next meeting of the MPC is scheduled for February 6-8, 2024.

Full text of RBI Governor Das’s prepared MPC statement: 8^th December’2023

As 2023 comes to an end and a new year begins, the long-awaited normality still eludes the global economy. The years 2020 to 2023 will perhaps go down in history as the period of ‘Great Volatility’, comprising a host of black swan events in quick succession. The global economy is showing signs of a slowdown, though unevenly across geographies and sectors. The Emerging Market Economies (EMEs) as a group have remained resilient during the current bout of volatility, unlike previous episodes.

While headline inflation has receded from the highs of last year, it remains above target in many countries. Core inflation continues to be sticky, impeding the last mile of disinflation. Major central banks have kept rates on hold while refraining from forward guidance given the prevailing uncertainties. Financial markets remain volatile in their quest for definitive signals about the future path of interest rates.

Against this unsettled global economic backdrop, the Indian economy presents a picture of resilience and momentum. The real gross domestic product (GDP) growth for Q2 of the current financial year has exceeded all forecasts. The fundamentals of the Indian economy remain strong with banks and corporates showing healthier balance sheets; fiscal consolidation on course; external balance remaining eminently manageable; and forex reserves providing a cushion against external shocks. These factors, combined with consumer and business optimism, create congenial conditions for sustained growth of the Indian economy. Looking ahead, we endeavor to further build on these fundamentals which are the best buffer against global shocks in today’s uncertain world.

Decisions and Deliberations of the Monetary Policy Committee (MPC)

The Monetary Policy Committee (MPC) met on 6th, 7th and 8th December 2023. After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided unanimously to keep the policy repo rate unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains at 6.25 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent. The MPC also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

I shall now briefly set out the rationale for these decisions. Since the last policy, CPI headline inflation moderated to 4.9 percent in October from 7.4 percent in July. The moderation was observed in all components of CPI – food, fuel, and core (CPI excluding food and fuel). There has been broad-based easing in core inflation which is indicative of successful disinflation through monetary policy actions. The near-term outlook, however, is masked by risks to food inflation which might lead to an inflation uptick in November and December. This needs to be watched for second-round effects, if any. Domestic economic activity is holding up well as assessed in the previous MPC meetings and as reflected in the Q2:2023-24 GDP growth.

Against this backdrop, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent, but remain highly alert and prepared to undertake appropriate policy actions, as warranted. Monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations. The rate of action so far is still working its way into the economy. Hence, the MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Assessment of Growth and Inflation

Global Growth

The global economy continues to remain fragile. World trade is decelerating amidst a global tide of protectionism. Despite the significant restoration of global supply chains, factors like elevated debt levels, lingering geopolitical hostilities and extreme weather conditions aggravate the risks to global growth and inflation outlook. The easing of inflation in advanced economies has led to expectations of an early end to the monetary tightening cycle, shoring up market sentiments. Sovereign bond yields are softening as markets are not factoring in any further rate hikes.

Domestic Growth

Economic activity exhibited buoyancy in Q2 aided by strong domestic demand. GDP posted a robust growth of 7.6 percent in Q2 2023-24, driven by investment and government consumption.

Turning to Q3, two-thirds of rabi sowing has been completed despite the late harvest of kharif crops in some states. The manufacturing sector gained strength with easing input cost pressures and pick-up in demand conditions. Eight core industries recorded healthy growth in October and continued their high growth since June this year. The purchasing managers’ index (PMI) for manufacturing rose in November. The services sector buoyancy has remained intact as reflected in high-frequency indicators. GST collections at ₹1.68 lakh crore in November 2023 were buoyant. Services PMI displayed healthy expansion in November.

On the demand side, households’ consumption is supported by durable urban demand and gradual turnaround in rural demand as reflected in sales of fast-moving consumer goods (FMCG) and other indicators. Festival-related demand is also spurring households’ discretionary consumption in Q3. Investment activity continues to be aided by buoyancy in public sector capex. This is also reflected in the strong growth in steel consumption, cement production, and imports of capital goods. Capacity utilization (CU) in the manufacturing sector continues to remain above the long-period average.

Investments in fixed assets by listed private manufacturing companies also registered healthy growth in H1:2023-24, primarily driven by key industries such as petroleum, steel, chemicals, and cement. The total flow of resources to the commercial sector from banks and other sources at ₹17.6 lakh crore during the current financial year so far is significantly higher than that of last year (₹14.5 lakh crore). Despite weakness in external demand, both goods and services exports returned to positive territory in October.

 

Looking ahead, private consumption should gain support from the gradual improvement in rural demand, strengthening of manufacturing activity, and continued buoyancy in services. The healthy twin balance sheets of banks and corporates, high capacity utilization, continuing business optimism, and the government’s thrust on infrastructure spending should propel private sector capex. The drag from external demand is also expected to moderate with a turnaround in merchandise and services exports. The protracted geopolitical turmoil, volatility in global financial markets and growing geo-economic fragmentations, however, pose risks to the outlook.

Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 7.0 percent with Q3 at 6.5 percent; and Q4 at 6.0 percent. Real GDP growth for Q1 2024-25 is projected at 6.7 percent; Q2 at 6.5 percent; and Q3 at 6.4 percent. The risks are evenly balanced.

Inflation

Food inflation, which was in double-digits in July, has since then moderated to 6.2 percent in October with the correction in vegetable prices. Fuel inflation slipped into deflation since September primarily reflecting the sharp fall in LPG prices in end-August. The disinflation in core gathered momentum during September-October and reached levels last seen during Q4:2019-20 due to the combined effect of policy rate increases and reduction in cost-push pressures across core goods and services.

Going ahead, the inflation outlook would be considerably influenced by uncertain food prices. High-frequency food price indicators point to an increase in prices of key vegetables which may push CPI inflation higher in the near term. The ongoing Rabi sowing progress for key crops like wheat, spices, and pulses needs to be closely monitored. Elevated global sugar prices are also a matter of concern.

On the positive side, global commodity prices, particularly, agricultural commodity prices have softened except for rice. For highly import-dependent food items like edible oils, international prices continue to remain soft. Domestic milk prices are stabilizing. Proactive supply-side interventions by the government are also containing domestic food price pressures. Crude oil has softened considerably, though it may remain volatile.

Taking into account these factors and on the assumption of normal monsoons, CPI inflation is projected at 5.4 percent for 2023-24, with Q3 at 5.6 percent and Q4 at 5.2 percent. CPI inflation for Q1 2024 -25 is projected at 5.2 percent; Q2 at 4.0 percent; and Q3 at 4.7 percent. The risks are evenly balanced.

What do these Inflation and Growth Conditions mean for Monetary Policy?

We have made significant progress in bringing down inflation to below 5 percent in October 2023 despite occasional blips due to intermittent supply shocks. The summer of 2022 is behind us. Our policy of prioritizing inflation over growth, hiking the policy rate by 250 basis points in a calibrated manner, and draining out excess liquidity have worked well, alongside supply-side measures taken by the government, to bring about this disinflation. The fact that core inflation has also trended lower and household inflation expectations have become better anchored gives us the confidence and conviction that monetary policy is doing its job. On the other hand, growth remains resilient and robust, surprising everyone on the upside.

Notwithstanding this progress, the target of 4.0 percent CPI is yet to be reached and we have to stay the course. Headline inflation continues to be volatile due to multiple supply-side shocks which have become more frequent and intense. The trajectory of food inflation needs to be closely monitored. Intermittent vegetable price shocks could once again push up headline inflation in November and December. While monetary policy would look through such one-off shocks, it has to stay alert to the risk of such shocks becoming generalized and derailing the ongoing disinflation process. Amid these uncertainties, monetary policy has to remain actively disinflationary to ensure a durable alignment of headline inflation to the target rate of 4.0 percent, while supporting growth.

Liquidity and Financial Market Conditions

Like most other central banks, the Reserve Bank had injected additional liquidity into the system to counter the COVID-19-related onslaught on the economy. Consequently, the size of the Reserve Bank’s balance sheet had expanded significantly. The persistence of such an expanded balance sheet for far too long could have created macroeconomic and financial instability. It is worth noting that the Reserve Bank has successfully reduced its balance sheet size well in time.

Illustratively, the size of the Reserve Bank’s balance sheet swelled to 28.6 percent of GDP in 2020-21. With modulation in liquidity in the post-COVID period, the balance sheet size moderated to 23.3 percent of GDP in 2022-23 and further to 21.6 percent in the current financial year (up to December 1). We consider this as a significant achievement.

System liquidity, as measured by the net position under the liquidity adjustment facility (LAF), turned into deficit mode for the first time in September 2023 after a gap of nearly four and a half years since May 2019. Deficit liquidity conditions persisted during October and November prompting large recourse to the marginal standing facility (MSF) by banks In parallel, utilization of the standing deposit facility (SDF) has also been high.

The overall tightening of liquidity conditions is attributed mainly to higher currency leakage during the festive season, government cash balances, and the Reserve Bank’s market operations. Driven by these autonomous factors, system liquidity tightened significantly compared to what was envisaged in the October policy statement. Consequently, the need to undertake an auction of OMO sales has not arisen so far.

The evolution of liquidity conditions has been in alignment with the monetary policy stance. More recently, however, as government spending has picked up and system liquidity has gotten more evenly balanced among market participants, pressures have eased and the net LAF position has evened out broadly. Going forward, government spending is likely to further ease liquidity conditions. On our part, the Reserve Bank will remain nimble in liquidity management.

Different segments of the financial market have witnessed monetary transmission to varying extents. Long-term G-sec yields have softened, reflecting strong demand for these bonds from financial institutions and softening of global bond yields. In the credit market, monetary policy transmission is still working its way through the system.

Regarding the standing facilities of the Reserve Bank under the LAF, we have noticed simultaneous high utilization of both MSF and SDF by the banks. This was pointed out in the last monetary policy statement. We propose to address this situation and have decided to allow the reversal of liquidity facilities under both SDF and MSF even during weekends and holidays with effect from December 30, 2023.25 It is expected that this measure will facilitate better fund management by the banks. This measure will be reviewed after six months or earlier if needed.

The Indian rupee has exhibited low volatility compared to its EME peers in the calendar year 2023, despite elevated US treasury yields and a stronger US dollar. The relative stability of the Indian rupee reflects the improving macroeconomic fundamentals of the Indian economy and its resilience in the face of formidable global tsunamis.

Recently, the Reserve Bank and the Bank of England have signed a Memorandum of Understanding on cooperation and exchange of information relating to the Clearing Corporation of India Ltd (CCIL), a Central Counterparty (CCP),27 regulated and supervised by the Reserve Bank. The MOU will enable the Bank of England to assess CCIL for recognition as a third-country CCP for UK-based banks to clear their transactions through CCIL. This MOU is based on principles of cooperation and trust among regulators of both countries. We hope regulators of other jurisdictions also accept these principles.

Financial Stability

Financial stability is a public good. The Reserve Bank judiciously uses micro and macro-prudential tools to safeguard financial stability. The recent pre-emptive measures taken by the Reserve Bank in respect of Banks and NBFCs were geared towards addressing potential risks and preserving the resilience of the financial sector. We do not wait for the house to catch fire and then act. Prudence at all times should be the guiding philosophy, both for the regulators and the regulated entities.

External Sector

In October 2023, both merchandise exports and imports came back into the expansionary zone. Services exports remained buoyant during Q2:2023-24. India has remained the top remittance-receiving country. The net balance under services and remittances is expected to partly offset India’s current account deficit and keep it within the parameters of viability.

On the financing side, foreign portfolio investment (FPI) flows have seen a significant turnaround in 2023-24 with net FPI inflows of US$ 24.9 billion (up to December 6) as against net outflows in the preceding two years. Net foreign direct investment (FDI), on the other hand, moderated to US$ 10.4 billion in April-October 2023 from US$ 20.8 billion a year ago. Net inflows under external commercial borrowings (ECBs) and non-resident deposit accounts are much higher than last year India’s external vulnerability indicators exhibit higher resilience in comparison with EME peers as well as since the taper tantrum period. India’s foreign exchange reserves stood at US$ 604 billion as of December 1, 2023. We remain confident of meeting our external financing requirements comfortably.

Additional Measures

I shall now announce certain additional measures.

Review of the Regulatory Framework for Hedging of Foreign Exchange Risks

The regulatory framework for foreign exchange derivative transactions was last reviewed in 2020. Based on market developments and feedback received from market participants, the extant regulatory framework for forex derivative transactions has been refined and consolidated under a single master direction. This will further deepen the forex derivatives market by enhancing operational efficiency and ease of access for users.

Framework for Connected Lending

The extant guidelines on connected lending are limited in scope. It has been decided to come out with a unified regulatory framework on connected lending for all regulated entities of the Reserve Bank. This will further strengthen the pricing and management of credit by regulated entities.

Regulatory Framework for Web-Aggregation of Loan Products

The Reserve Bank introduced the regulatory framework for digital lending in August/September 2022. The digital lending ecosystem also comprises services that aggregate loan offers from lenders (called web-aggregation of loan products) for the guidance of customers. Several concerns relating to such web-aggregation of loan products harming consumers’ interest have come to our notice. It has, therefore, been decided to lay down a regulatory framework for the web-aggregation of loan products. This is expected to result in enhanced customer centricity and transparency in digital lending.

Setting up of Fintech Repository

Financial entities like banks and NBFCs in India are increasingly partnering with FinTechs. For a better understanding of developments in the Fintech ecosystem and to support this sector, it is proposed to set up a Fintech Repository. This will be operationalized by the Reserve Bank Innovation Hub in April 2024 or earlier. FinTechs would be encouraged to provide relevant information voluntarily to this Repository.

Enhancing UPI Transaction Limit for Specified Categories

The limit for various categories of UPI transactions has been reviewed from time to time. It is now proposed to enhance the UPI transaction limit for payment to hospitals and educational institutions from ₹1 lakh to ₹5 lakh per transaction. This will help the consumers to make UPI payments of higher amounts for education and healthcare purposes.

e-Mandates for recurring online transactions – Enhancement of limit for specified categories

e-Mandates for making payments of a recurring nature have become popular among customers. Under this framework, an additional factor of authentication (AFA) is currently required for recurring transactions exceeding ₹15,000. It is now proposed to enhance this limit to ₹1 lakh per transaction for recurring payments of mutual fund subscriptions, insurance premium subscriptions, and credit card repayments. This measure will further accelerate the usage of e-mandates.

Establishment of Cloud Facility for the Financial Sector in India

Banks and financial entities are maintaining an ever-increasing volume of data. Many of them are utilizing the cloud facilities for this purpose. The Reserve Bank is working on establishing a cloud facility for the financial sector in India for this purpose. Such a facility would enhance data security, integrity, and privacy. It would also facilitate better scalability and business continuity. The cloud facility is intended to be rolled out in a calibrated fashion over the medium term.

Conclusion

In a global economy clouded by uncertainties, monetary policy actions, and communication can be a stabilizing force by anchoring the expectations of economic agents. Clarity and consistency in action and communication is a time-tested principle for effective monetary policy. Policymakers have to be mindful of the risk of being carried away by a few months of good data or by the fact that CPI inflation has come within the target range. They have to be also mindful of the risk of overtightening, especially when large structural changes and geopolitical and geo-economics shifts are taking place. On top of this, they have to be watchful of the risks from new shocks that could hit the economy from anywhere at any time.

We have now reached a stage when every action has to be thought through even more carefully to ensure overall macroeconomic and financial stability; more so, because the conditions ahead could be fickle. We have to remain vigilant and ready to act, as per the evolving outlook. India is better placed to withstand the uncertainties compared to many other countries. As the Indian economy treads the path to a brighter future, I recall the wise words of Mahatma Gandhi: “Progress is assured whenever there is …… an unalterable determination.”

RBI Governor’s Address Foot Notes: Financial data

·         The International Monetary Fund (IMF) in October 2023, projected world trade volume (goods and services) growth to decline sharply from 5.1 percent in 2022 to 0.9 percent in 2023 (revised down by 1.1 percentage points from the July 2023 projection before rising to 3.5 percent in 2024 (revised down by 0.2 percentage points)

·         The global supply chain pressures index (GSCPI), as released by the Federal Reserve Bank of New York, eased during the current financial year. It continues to remain below its historical average since February 2023 and fell sharply from the pandemic-era highs

·         In Q2:2023-24, the government's final consumption expenditure increased by 12.4 per cent, while gross fixed capital formation (investment) posted a growth of 11.0 per cent. On the supply side, real gross value added (GVA) rose by 7.4 percent, powered by a 13.9 percent increase in manufacturing and a 13.3 percent in construction activity

·         As of December 1, 2023, rabi sowing stood at 434.7 lakh hectares (out of full season normal area of 648.3 lakh hectares) which is 5.3 percent lower than last year, but 4.3 percent higher than the 5-year average (normal acreage) as on date

·         Results of 1,703 manufacturing companies for Q2:2023-24 exhibit robust growth in profits as well as salaries and wages component

·         Eight core industries grew by 8.4 percent in June; 8.5 percent in July; 12.5 percent in August; 9.2 percent in September; and 12.1 percent in October

·         PMI manufacturing continued to expand at 56.0 in November 2023.

·         In October 2023, e-way bills (30.5 percent), toll collections (13.0 percent), port traffic (13.8 percent), railway freight traffic (8.5 percent), and diesel consumption (9.3 percent) recorded robust growth

·         In November 2023, e-way bills (8.5 percent), toll collections (12.3 percent), and port traffic (17.0 percent) continued to post strong growth

·         The growth of GST collections in November 2023 was the highest in 11 months.

·         PMI services continued to expand at 56.9 in November 2023

·         Indicators of urban demand like domestic air passenger traffic, passenger vehicle sales, and household credit expanded by a double-digit rate in October

·         According to Nielsen data, FMCG volumes in the rural segment grew by 6.4 percent in Q2:2023-24 as compared to (-) 3.6 percent during Q2:2022-23 (4.0 percent in Q1:2023-24)

·         Amongst rural demand indicators, two-wheeler sales posted a significant turnaround and the contraction in tractor sales moderated in October

·         According to the Federation of Automobile Dealers Associations (FADA), for the 42 days festive period of October-November 2023, retail sales of two-wheeler and passenger vehicles recorded a growth of 20.7 percent and 10.3 percent, respectively

·         The combined (Centre plus States) Capital Outlay (viz., capital expenditure minus loans and advances) recorded a growth of 36.7 percent in April-October 2023 as against 29.4 percent last year

·         Steel consumption (15.3 percent), cement production (17.1 percent), and imports of capital goods (9.4 percent) grew strongly in October

·         Early survey results suggest capacity utilization increased by 40 bps to 74.0 per cent in Q2 2023-24. The long-term average is 73.7 percent which pertains to the period Q1:2008-09 to Q1:2023-24 excluding Q1:2020-21. Seasonally adjusted CU, however, declined by 90 bps and stands at 74.5 percent in Q2

·         India's merchandise exports expanded by 6.1 percent to $33.5 billion, while imports increased by 9.6 percent to $63.5 billion in October. Services exports expanded by 10.8 percent, while imports declined by 0.4 percent in October

·         The persistence of inflation pressures across various sub-groups, such as cereals, pulses, and spices, and pick-up in inflation in eggs, fruits, and sugar, however, has kept food inflation in October still elevated

·         Bloomberg Commodity Price Index moderated since the last MPC meeting. As per the United States Department of Agriculture (USDA), most agricultural commodities prices have moderated. Food and Agriculture Organization’s (FAO’s) food price index has eased since August 2023

·         According to the Reserve Bank’s survey of households, between September 2022 and November 2023 inflation expectations for 3 months ahead and 1 year ahead softened by 170 and 90 basis points, respectively

·         As of December 1, 2023, the balance sheet size was Rs.65.1 lakh crore, and based on the estimated nominal GDP of Rs.301.8 lakh crore in the Union Budget 2023-24, the balance sheet size to GDP ratio works out to 21.6 percent

·         MSF borrowing averaged nearly ₹0.95 lakh crore during September which further increased to ₹1.2 lakh crore during October-November 2023

·         The average fund parked under the SDF was at ₹0.62 lakh crore and ₹0.58 lakh crore in October and November, respectively

·         The weighted average lending rate (WALR) on fresh rupee loans rose by 199 basis points (bps) while that on outstanding loans rose by 112 bps during the current tightening cycle (May 2022 – October 2023). The weighted average domestic term deposit rates (WADTDRs) on fresh deposits and outstanding deposits rose by 228 bps and 172 bps, respectively, during the same period

·         The coefficient of variation for the daily INR exchange rate vis-à-vis the US dollar was 0.66 (CY 2023), which is the lowest among peer emerging economies, including China, Malaysia, Russia, Turkey, Vietnam, South Africa, and Thailand

·         Central counterparties (CCPs) help manage counterparty credit risk and consequently reduce systemic risks of financial markets by mitigating the impact of failure of an institution

·         On November 16, 2023, the Reserve Bank increased the risk weights on unsecured consumer credit exposures of banks and NBFCs (including credit card receivables) as well as bank lending to NBFCs, other than housing finance companies (HFCs). The regulated entities have also been advised to put in place Board approved limits for various sub-segments under consumer credit, specifically unsecured consumer credit

·         The key financial indicators of scheduled commercial banks (SCBs) show further improvement. In September 2023, the CRAR of SCBs increased to 16.8 percent from 16.0 percent in September 2022

·         Gross non-performing assets (GNPA) and net non-performing assets (NNPA) ratios declined to a decadal low of 3.3 percent and 0.8 percent, respectively as of September 2023

·         The return on asset (ROA) of SCBs increased to 1.3 per cent as of September 2023 from 1.0 per cent in September 2022

·         The net interest margin (NIM) of SCBs improved to 3.7 percent as of September 2023 from 3.5 percent in September 2022

·         The liquidity coverage ratio (LCR) of SCBs was comfortable at 135.4, much above the minimum stipulation of 100

·         The indicators of non-banking financial companies are also in line with those of the banking system as per the latest available data

·         As per India’s balance of payments statistics, India’s inward remittances stood at US$ 112.5 billion in 2022-23

·         Net outflows of US$ 14.1 billion in 2021-22 and US$ 4.8 billion in 2022-23

·         Net inflows of ECBs to India were US$ 3.9 billion during April-October 2023 as against net outflows of US$ 4.2 billion a year ago

·         Non-resident deposit accounts witnessed higher net inflows at US$ 5.4 billion during April-September 2023 as compared with US$ 2.8 billion a year ago

·         External debt to GDP ratio and reserves to external debt ratio were placed at 18.6 percent and 94.6 percent in end-June 2023, respectively

·         The FX reserve cover of imports is over 10 months

Highlights of opening statement by RBI Governor Das: 8^th December’2023

·         The years 2020 to 2023 will perhaps go down in history as a period of ‘Great Volatility’.

·         India’s GDP growth remains resilient and robust as reflected in our projection of 7% growth in the current year

·         On the inflation front, the summer of 2022 is behind us. We have made significant progress in bringing down inflation. The steady decline in core inflation indicates that monetary policy is working

·         Moving forward, inflation management cannot be on auto-pilot. The future path is expected to be clouded by uncertain food prices. CPI data for November is expected to be high

·         The MPC will be highly alert to any signs of derailing the ongoing disinflation process. Based on the evolving situation, the MPC will take appropriate action to reach the 4% target

·         Liquidity will be actively managed consistent with Monetary Policy

·         The balance sheet of the financial sector remains robust. Sectoral and institution-specific signs of stress are being proactively monitored and addressed. We do not wait for the house to catch fire and then act. Prudence at all times is our guiding philosophy

·         The current account deficit (CAD) is expected to be modest and comfortably financed

·         Foreign exchange reserves at US $604 billion provide a strong buffer against global spillovers

·         The stability of the Indian Rupee reflects the improving macroeconomic fundamentals of the Indian economy and its resilience in the face of formidable global tsunamis

Highlights of RBI MPC Presser and Q&A (RBI Governor Das and Dy. Gov. Patra): 8^th December’2023

·         Banks & NBFCs are in great health; but RBI is also watchful and taking some proactive regulatory steps for any issues about unsecured personal/retail lending, which is growing exponentially

·         The market is expecting RBI to pause and the end of the current tightening cycle; as RBI on a neutral mode, overnight call money rate, the target of the monetary policy is now also gradually aligning with the repo rate (from 6.75% to 6.50%)

·         “If you notice in the first few days of December, the call rate has already started gravitating towards the repo rate. In fact, on the 4th and 5th of December, it was 6.45% sub-repo, and you will see that this is coincidental with Government spending. Government balances have been coming down and the previous tightness was also associated with a build-up of balances”

·         “We have always tried to take a balanced call, and this is not the first time that we have said so. What our Monetary Policy is as prescribed in the law? The primary target is price control in terms of maintaining 4% inflation which I have emphasized very clearly in my statement. I mentioned it again here in my opening remarks. The law also requires that we have to keep in mind the objective of growth”

·         “Last year in May, we spelled out that when we shifted our focus and prioritized inflation over growth, that same approach continues. There is no change in that stance. It is to place things in a particular perspective. I have tried to explain the overall approach that central banks adopt and in particular, the approach that the Reserve Bank has been approaching. Our decisions, as I have said, are dependent on two major parameters. That is inflation and growth. Inflation is our top priority now. We still have a distance to cover to reach 4% inflation”

·         “The use of the risk of overtightening should be read along with the previous sentence where I said that a few months of good data should not push us into some kind of complacency and the fact that inflation has come within the target range also should not lead to any kind of complacency. So, a mention of the word ‘overtightening’ should not be read as a change in our approach. It would be wrong to assume that any kind of loosening et cetera is around the corner. That is not on the table at the moment. Let me be very clear. It is not at all on the table. Look at the inflation numbers; look at the inflation trajectory. So, we still have a distance to cover.”

·         RBI is cognizant of the risk of the stock market overheating and pumping retail money into the derivative segment funded through unsecured retail/personal lending, but SEBI is the regulator here

·         RBI does not intend to curb the growth trajectory of banks & NBFCs, having high growth unsecured retail lending, but like to continue the pro-active prudential stance/action in warning/regulation, so that it can’t fall behind the curve in maintaining financial stability

·         “As it was mentioned while making that announcement itself, it was a pre-emptive measure to bring certain prudence and to bring an end to any sort of exuberance that may be exhibited by certain lenders. The effort was made over the previous 3-4 months by way of sensitizing the players to put adequate internal control measures to ensure that the risk build-up is avoided. As the market was not responding enough to that, there was a necessity, as we had mentioned earlier, to watch the data and based on the data, we have taken certain measures to strengthen the prudential measures that the regulated entities have to put in place.”

·         “It is too early to see or pass a conclusion as to what sort of effect it is taking. But at least from our interactions with the market participants, the financial system as well as some of the articles is alluding to the fact that there are risk management practices are getting better, underwriting is getting better, and any business model that is likely to throw up an enhanced risk is curtailed. That is our intention. It is not to curtail the growth and we have taken care to exclude growth drivers, the segments like home loans or vehicle loans, or the small borrowers or SHG, those segments have been kept outside of this purview. So, we would expect the lenders to conduct themselves and draw their business models in a manner in which an avoidable risk buildup is mitigated.”

·         “Essentially, these measures were intended to address the interconnectedness that was building up within the financial system and also to curtail it because as we had highlighted, it was growing at about 24%, 25% on a YoY basis as compared to the rest of the system that was growing at about 12% to 14%.”

·         “So, that particular segment of bank lending to NBFC had to be calibrated and we have tried doing it through the risk weight. Also, the NBFC's growth in certain segments was an outlier, so for that particular segment, we have to add risk weight. So, it is a kind of prudential measure at this point. It is not to deny liquidity. It is not to ration the lending. It is only that, we would like the lenders to have adequate risk weights put in place and limits to be set in place for prudential monitoring. That's all.”

·         “Risk weights, as already mentioned, is essentially a prudential measure to curb growth or moderate the credit growth in certain specific sectors. It is not tantamount to turning off the tap. The tap is open but the only thing may be the pressure has then reduced a bit. So, I do not think that is the intention and is unlikely to be the outcome of the measure which we have announced.”

·         “Just to supplement that, up to Rs.50,000-category to put a context to it the composition of that particular segment is less than half a percent of the total outstanding. While of course, it may be dealing with a lot of number of people, it is a segment that cannot pose a great risk on its own because the total quantum itself is less than 0.5%. That is in terms of the context part.”

·         “The second is that, as I mentioned, we have what we would like to curtail and expect the lending institutions to provide for more by way of additional risk weight is some of those consumption-led segments or unsecured credit which do not have a defined end-use. We have taken care to support whatever growth drivers are already there.”

·         So, whatever lending was taking place for which a clear end-use was not visible or completely unsecured without a clear purpose is what will get curtailed. Based on this there will be some recalibration of business models, and also a recalibration of the growth number which is what the intended effect of the regulation is. If it is playing out, that is only giving the intended results and as DG (MRR) clarified it is not our intention to deny or ration credit. There is enough headroom available. The exposure framework permits adequate lending to be provided to support growth.”

·         RBI is still in ‘removal of accommodation’ mode, not ‘neutral’ or signaling any kind of shifting towards neutral as headline inflation is still far away from +4.0% targets; RBI’s policy continues to remain disinflationary

·         “I do not know on what basis you are reaching that conclusion. We do not communicate anything inadvertently. Let me make it very clear. All our communication is carefully prepared. We are aware that in the markets and the media, you analyze every corner of the statement, the comma, full stop, everything.”

·         “So, we are very careful in our communication. There is no inadvertence in any of our communications. If somebody is assuming that it is a signal to move towards a neutral stance, it would be incorrect. It will not be correct at all. You look at the inflation trajectory. We are still away from the 4% target and we have said that the Monetary Policy continues to remain actively disinflationary. So, it would be a mistake to read that we are giving any kind of signal that we are moving toward neutral. That would be a wrong interpretation.”

·         RBI is quite optimistic about growing international confidence in India amid improving interest from FPIs, quality of Indian products, merchandise and service export

·         “The major factor is that there is growing international confidence in the Indian economy. My interactions with Governors of other countries, with various other regulators and stakeholders, and other investors, in particular from other countries, major investors who visit India and some of them do come to the RBI and meet us. There is growing confidence in the potential of the Indian economy and India's capacity to grow that is probably something, that is noteworthy, and that also translates into another area namely confidence from the point of view of investing, there is a kind of confidence in the quality of Indian products and more particularly the quality of India's services exports. There is greater confidence in the quality of our merchandise exports and in the quality of our services exports which is the inherent quality and the strength of all that we are doing.”

·         Considering the overall macro-economic and geo-political uncertainty, RBI is still not in a position for any specific forward guidance about any possible rate cut timeline and RBI is still open for any rate hike if inflation spikes again; RBI is also watching the Fed and ECB closely they are also refraining from specific forward guidance

·         “Specifically on the rates and the cut, etc., I have stated, and DG Michael Patra has also stated that we refrain from giving any forward guidance considering that with the kind of uncertainty that lies ahead of us. In the concluding paragraph of my statement, I have said that the future looks very fickle, and I have also said that new shocks can hit any economy. It can come from anywhere and hit any economy anytime.”

·         “So, if that is the level of uncertainty and if our inflation is still quite away from 4%, we just cannot give any forward guidance about whether we will tighten further or we will loosen or what we will do? Everything depends on the evolving situation. It is not possible in the current situation for any central bank to give forward guidance. You would have seen that the level of forward guidance also given by many central banks internationally has now sort of come down.”

·         RBI believes Indian unemployment rate around 6.6% in Sep’23, not 10% as being reported by some foreign-based experts; internally RBI always refers to/discusses to Government’s Periodic Labor Force Survey (LFS) and the overall employment situation of the country internally; at around 6.5% unemployment rate, Indian economy is now towards maximum employment with maximum labor force participation rate

·         As interest rates are deregulated, RBI can’t force banks to hike their deposit rates while going for higher lending rates

·         Going by the high-frequency data in October-November and better than expected real GDP growth in Q2, RBI is quite confident about its projection of real GDP growth of+7.0% for FY24 despite some weakness in consumer/rural spending, private CAPEX and external trade

·         Recent Festival season 2-wheeler, FMCG sales were quite upbeat, while demand for NREGA has declined, which is positive for rural demand despite adverse weather events

·         Government (Federal state) CAPEX is quite robust, while private CAPEX is also happening in petroleum (refinery), steel, cement and chemicals; capacity utilization is also increasing to maximum threshold levels

·         Some companies are utilizing their free cash flow for fresh CAPEX rather than going for fresh debts or equities

·         “Quite a bit of investment is already taking place in private-sector manufacturing companies. For example, the investment in fixed assets by listed private manufacturing companies has registered a growth of 10.5% in the first half of the current financial year and several companies, according to our survey and the inputs, in the manufacturing sector are using their internal reserves and surpluses to invest. They are not approaching the bank or they are not resorting to any other kind of borrowing or raising funds. The high-frequency indicators of investment, such as steel consumption and cement production and very importantly import of capital goods are also showing good growth. All these indicate that the investment cycle should continue.”

·         RBI does not think there will be a sudden huge inflow of FPIs as a result of India’s inclusion of the JPM Global bond index, probably from June’24; but as usual, RBI will take care of FX management by calibrated intervention for any unusual volatility in USDINR (on both sides)

·         The interest rate for lending for various products/services is a domain for banks in line with laid down policies and existing MCLR/another external/internal benchmark; RBI leaves it to commercial decision and wisdom of lending institutions and can’t dictate or interfere unless there are a financial stability issues due to unhealthy competition

·         On RBI’s lack of clear forward guidance:

·         RBI is still maintaining the removal of accommodation policy as India’s real GDP growth rate of around 7% is on the trend, while headline inflation around +5.40% average for 2023 is still substantially above the +4.0% targets

·         “The Governor has explained this several times, but let me take the last attempt. So, in modern times, Monetary Policy is chiefly operated through the interest rate and Monetary Policy is a tool of stabilization. By stabilization, I mean that when GDP goes way above its trend the task of Monetary Policy is to bring it down to its trend, and when inflation goes above its target, Monetary Policy tries to bring down inflation to the target”

·         “When this kind of thing happens, GDP goes above target or inflation goes above target, Monetary Policy raises the interest rate and conversely, when it is below, it reduces the rate. So, increasing and reducing rates is probably with some kind of benchmark. So, there is a certain benchmark where if inflation is at target and GDP is at trend; Monetary Policy has to neither restrict nor accommodate”

·         “At the current time, GDP is at potential, i.e., at trend with the new number, but inflation is way above target. If you take the average for the year, it is 5.4% and the target is 4%. So, we have to withdraw accommodation further to bring back inflation from 5.5% to 4%. That is the withdrawal of accommodation”

·         “We are not giving any forward guidance about our specific actions about stance or concerning the rates. Concerning stance, the deputy governor has explained what is meant by the withdrawal of accommodation”

·         “So, you can interpret from that when the RBI will probably if that situation materializes, that can be a situation where the RBI can think of changing the stance, but at the same time reaching 4% should not just be a one-off event, it has to be durably 4% and as the monetary the MPC should have confidence that yes, 4% has now become durable”

·         “You can also interpret from that when the stance will change and concerning the rates, I will not be able to give any forward guidance that will depend on the evolving situation since this is the last question, I guess I just wanted to say it just for clarification because media has its way of interpreting statements and I don't want to be inadvertent in any manner”

·         “I referred to Arjuna’s quiver. Let me say very emphatically that we have no exalted notion of ourselves as an institution. It was just a kind of analogy or a metaphor I used to explain to just say that a particular instrument is available with the Reserve Bank. There is no intention to have an exalted opinion of ourselves or to assume that we have become equal to a great warrior. We draw lessons from the principles that the character (warrior) Arjuna and Mahabharata has demonstrated from time to time”

Conclusions:

On 8^th December, the focus of Dalal Street was on the RBI policy meeting (MPC) outcome. As highly expected, RBI holds all its key policy rates. RBI kept the benchmark policy repo rate at +6.50%, effective reverse repo rate (SDF) at +6.25%, MSF (Marginal Standing Facility), and Bank rate at +6.75%.

Although there were some expectations of a dovish hold this time; i.e. RBI/Governor Das may indicate the end of the present cycle of tightening and shift to a neutral stance, which may eventually transform into the next cycle of rate cuts (easing), which is natural for any central bank, if core inflation indeed slips drastically or even hovering towards targets so that real rate of interest is kept at an appropriate restrictive level.

But despite core CPI hovering around +4% targets for the last few months, RBI/Das preferred the continuity of the hawkish hold stance and higher for a longer stance. RBI Governor Das categorically denied any thinking of a policy shift to easing or even neutral in the coming days despite a clear indication by the Fed to start easing by H2CY24. This may be because unlike global central banks (Fed/ECB), RBI does not provide any official forward guidance well in advance or indulge in random jawboning to control bond yields/financial market.

In any way, India’s total/headline CPI was around +5.55% in November (y/y), while the 6M rolling average was around +5.77%, the YTM average +5.72% and the 6M sequential average annualized run rate was around +8.00% amid surging food inflation. On the other side, India’s core CPI/core inflation was around +4.10% in November from around +6.10% in Jan’23.  The average core CPI is now around +5.0% in 2023 against +6.0% in 2022-21. The YTM average of India’s CPI is now around +5.7% in 2023 against +6.7% in 2022, +5.1% in 2021 and +6.6% in 2019 (pre-COVID).

India’s sequential CPI rate has been quite elevated for the last few years even before COVID due to higher population, higher fiscal stimulus, higher demand and various supply disruptions from local weather, logistics and geopolitics. Simply put, the present supply capacity of the economy is quite lower than the growing demand. The average sequential CPI rate is now almost +0.50% for the last 5 years. In 2023, even after RBI hikes, the YTD average rate of sequential CPI rate was around +0.43%. The average of 2023 CPI would be around 5.6% (~5.5%). If the average sequential CPI rate falls further to around +0.38% in 2024 and +0.26% in 2025, the headline CPI should be around +4.4% and +3.8%; i.e. at target on a sustainable basis by CY25 or FY25.

 

Although RBI officially targets headline/total CPI, in reality, it’s now increasingly emphasizing core CPI data (in line with global central banks), although there is no official data/index about core CPI from India’s MOSPI, the government statistical agency. In this way, as per RBI’s projections and present trend, India’s core CPI may further fall to around +4.00% or even below that on average for 2024. Thus RBI may cut rates from April-June’24 by around 75-100 bps in FY25 (in line with the Fed) so that the core real repo rate would be around 1.75-1.50% in line with the present restrictive stance; at present RBI’s core real rate is around +1.50% considering average core CPI for 2023 around +5.0% and repo rate +6.50%.

Depending upon the inflation and GDP growth equation/mandate, RBI may prefer to maintain a 1.00-1.50% core real rate in the coming days. In 2025 (FY26), if India’s core CPI further falls to around +3.0% on average, then RBI may cut further by around another 100 bps for a repo rate of +4.50%, which would be a longer run terminal rate against the Fed’s +2.50%.

RBI may start to cut from Aug’24, if Fed starts the same from June’24:

In any way, at the current run rate and trend, the average US core PCE inflation should be around +4.0% in 2023, +2.5% in 2024, +2.1% in 2025, and +1.5% in 2026, in line with Fed’s Dec’23 SEP. Similarly, the U.S. core CPI average should be around +4.6% in 2023, +3.2% in 2024, +2.5% in 2025 and +1.8% in 2026.

If US core CPI indeed dips below +3.0% by May-June’24 and if it seems that the 2024 average core inflation will be around +3.2%, then the Fed may start cutting rates from June’24 and may cut cumulatively 75 bps at -0.25% pace till Dec’24 for a repo rate at 4.75%, so that core real rate continues to stand around +1.50%, in line with the present restrictive stance (5.50% repo rate-4.00% average core CPI for last 6M).

Although RBI is still not indicating any rate cuts in the coming months in line with its hawkish hold stance (higher for longer) and not issuing any official forward guidance, in reality, RBI is bound to follow the Fed’s actual policy action to maintain present policy parity and real bond yield differential. Thus RBI may start cutting rates from Aug’24 (after the June’24 general election) for cumulative cuts of -75 bps in 2024 (in line with the Fed, everything being equal).                                     

India’s general election may be announced by the EC in mid-March (similar to the 2019 schedule), with the start of the actual voting from mid-April to late May and the formation of the next government (led by Modi/BJP) in early June and the presentation of a full-fledged Federal budget early July (after a vote on account budget in February). Thus RBI will have a complete idea of the Government’s fiscal stimulus programmes and the requirement of debts to fund budget/fiscal deficit.

Accordingly, RBI may officially indicate the end of the present tightening cycle in the February meeting and shift to neutral mode (ahead of the announcement of the election schedule by the EC and the imposition of model conduct of code). RBI may further hold rates in April and June with a dovish hold stance with a clear indication of rate cuts from Aug’24 (if India’s core CPI dips well below +4.0% by then). RBI may cut -25 bps each in August, October and December for a cumulative rate cut of -75 bps in CY2024 for a repo rate of +5.75% against the Fed’s +4.75% (after similar -75 bps rate cuts). RBI may use the total/headline CPI and core CPI data at its convenience officially to justify rate cuts. At present, RBI is quite optimistic about India’s growth potential, while cautious about still elevated inflation.

Technical trading levels: Nifty Future

Whatever the narrative, technically Nifty Future (21830) now has to sustain over 22100-22200 for a further rally to 22450/22675-22850/23025 and 23260-23575 levels in the coming days; otherwise sustaining below 22050/22000, may fall to 21700/21600-21475/21300, further 21125/20850-20725/20575-20350. And sustaining below 20350, Nifty Future may again fall to 20150/20000-19900/19650 and 19400/19150-18850/18700 in the coming days.

 

 

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