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Nifty may come under stress on fading hopes of an early and deeper RBI/Fed rate cuts
Ahead of the general election, RBI/Government is now more cautious about maintaining some price stability, while the economy growing above 7%
On 8th February, India’s Central Bank RBI held its benchmark policy repo at 6.5% for the 6th consecutive meeting without signaling any rate cut talks to ensure sticky/elevated inflation (CPI) eased back towards +4.0 targets while supporting GDP growth. The market was expecting some dovish stance from RBI this time such as the official declaration of the end of the tightening cycle/removal of accommodation stance to a so-called neutral stance and subsequent logical next step of rate cuts amid cooling core inflation almost around 4% targets in a sustainable basis. But RBI/Governor Das sounded more hawkish than expected and Nifty slips to some extent on a hawkish hold stance.
Full text of RBI Governor Das’s prepared MPC statement: 8th Feb’24
“This is the first monetary policy statement of 2024, a momentous year for the Reserve Bank of India which enters its 90th year of existence and operations on April 1. Over the years, the Reserve Bank has established itself as a credible institution that stands for stability, trust, and economic progress. In recent years, it has become a pioneer in fostering innovation and technology in the financial system. Customer centricity and financial inclusion have always been its priorities.
The Reserve Bank’s tireless efforts towards maintaining a fine balance among price stability, financial stability, and external sector stability have paid rich dividends as the country embarks on a higher growth trajectory in the years to come. As India gains a pole position in the new global order, the contribution of the Reserve Bank is getting widely recognized in India and abroad.
The global economy continues to present a mixed picture. On the one hand, the odds of soft-landing have increased with inflation moving closer to the target and growth holding up better than expected in major advanced and emerging market economies. On the other hand, the ongoing wars and conflicts and the emergence of new flashpoints in different parts of the world, with disruptions in the Red Sea being the latest in the series, impart uncertainty to the global macroeconomic outlook.
In this unsettled global environment, the Indian economy has performed remarkably well in recent years. Growth is accelerating and outpacing most forecasts, while inflation is on a downward trajectory. At the current juncture, India’s potential growth is propelled by structural drivers like improving physical infrastructure; development of world-class digital and payments technology; ease of doing business; enhanced labor force participation; and improved quality of fiscal spending. Our multi-pronged, proactive, and calibrated policies on the monetary, regulatory, and supervisory fronts have worked well to maintain and strengthen macroeconomic and financial stability.
Decisions and Deliberations of the Monetary Policy Committee (MPC)
The Monetary Policy Committee (MPC) met on 6th, 7th and 8th February, 2024. After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided by a 5 to 1 majority to keep the policy repo rate unchanged at 6.50 percent. 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. The momentum in domestic economic activity continues to be strong. Headline inflation, after moderating to 4.9 percent in October, rose to 5.7 percent in December 2023. This was primarily due to food inflation, mostly vegetables. The softening in core inflation (CPI inflation excluding food and fuel) continued across both goods and services, reflecting the cumulative impact of monetary policy actions as well as significant softening in commodity prices. The uncertainties in food prices, however, continue to impinge on the headline inflation trajectory.
Taking into account this growth-inflation dynamics and the fact that transmission of the cumulative 250 bps policy rate hike is still underway, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent. The MPC will carefully monitor any signs of generalization of food price pressures which can fritter away the gains in easing of core inflation. Monetary policy must continue to be actively disinflationary to align inflation to the target of 4 percent on a durable basis. The MPC will remain resolute in this commitment. The MPC also decided to remain focused on the withdrawal of accommodation to ensure fuller transmission and anchoring of inflation expectations.
Assessment of Growth and Inflation
Global Growth
Global growth is expected to remain steady in 2024 with heterogeneity across regions. Though global trade momentum remains weak, it is exhibiting signs of recovery and is likely to grow faster in 2024. Inflation has softened considerably and is expected to moderate further in 2024. Financial markets are volatile as market participants adjust their expectations on the timing and pace of rate cuts by major central banks who remain cautious against premature easing in their fight against inflation.
Amidst the current headwinds, elevated levels of public debt are raising serious concerns about macroeconomic stability in many countries, including some of the advanced economies (AEs). The global public debt to GDP ratio is projected to reach 100 percent by the end of this decade. The public debt levels in AEs are much higher than those in the emerging market economies (EMEs).
The challenges of debt sustainability in an environment of high interest rates and low growth at the global level can become new sources of stress. Reducing debt burdens is necessary to create fiscal space for new investments in priority areas, including green transition. As regards India, given the fiscal consolidation path as well as improving growth prospects, we expect the general government debt to gradually come down.
Domestic Growth
Domestic economic activity remains strong. The first advance estimates (FAE) placed the real gross domestic product (GDP) growth at 7.3 percent for 2023-24, marking the third successive year of growth above 7 percent.
Going forward, the momentum of economic activity witnessed during 2023-24 is expected to continue in the next year (2024-25). Agricultural activity is holding up well despite lower rainfall, lower reservoir levels, and delayed sowing. Rabi sowing has surpassed last year’s level as well as the normal acreage. The allied sector is also expected to provide major support to agriculture with continued momentum in horticulture and fisheries.
Industrial activity is gaining steam on the back of improving the performance of manufacturing. The early results of corporates in the manufacturing sector remain upbeat, driven by higher profit margins. The purchasing managers’ index (PMI) for manufacturing is displaying expansion along with strengthening of the future activity index.
Services sector activity is expected to remain resilient on the back of strong domestic demand and stable global prospects. The PMI services increased significantly in January (2024), suggesting continued strong expansion. The buoyant demand for residential housing, coupled with increased thrust on government capex, is expected to propel construction activity.
On the demand side, improving employment conditions and moderating inflation, together with a rebound in agricultural activity should push up household consumption. Rural demand continues to gather pace. Strengthening farm-level activity as reflected in declining MNREGA demand and the extension of Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) should further support rural consumption. Urban consumption remains strong on the back of improved income levels.
The investment cycle is gaining steam, aided by sustained thrust on government capex; increasing capacity utilization; rising flow of resources to the commercial sector; and policy support from schemes such as production incentives (PLI). Revival in private corporate investment is also underway. Our survey suggests that investment intentions of private corporates remain upbeat and both services and infrastructure firms are optimistic about overall business conditions. Net external demand is also improving with the narrowing merchandise trade deficit.
Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.0 percent with Q1 at 7.2 percent; Q2 at 6.8 percent; Q3 at 7.0 percent; and Q4 at 6.9 percent. The risks are evenly balanced.
Inflation
Headline inflation moderated to an average of 5.5 percent during April-December 2023 from 6.7 percent during 2022-23. Food price inflation, however, continued to impart considerable volatility to the inflation trajectory. In contrast, the deflation in CPI fuel deepened and core inflation (CPI inflation excluding food and fuel) moderated to a four-year low of 3.8 percent in December. The decline in core inflation continued to be broad with inflation remaining steady or softening across its constituent groups and sub-groups.
The inflation trajectory, going forward, would be shaped by the outlook on food inflation, about which there is considerable uncertainty. Adverse weather events remain the primary risk with implications for the Rabi crop. Increasing geopolitical tensions are leading to supply chain disruptions and price volatility in key commodities, particularly crude oil. On the positive side, the progress in Rabi sowing has been satisfactory and augurs well for the season. Prices of key vegetables, especially onions and tomatoes, are registering seasonal price correction.
Taking into account these factors, CPI inflation is projected at 5.4 percent for the current year (2023-24) with Q4 at 5.0 percent. Assuming a normal monsoon next year, CPI inflation for 2024-25 is projected at 4.5 percent with Q1 at 5.0 percent; Q2 at 4.0 percent; Q3 at 4.6 percent; and Q4 at 4.7 percent. The risks are evenly balanced.
What do these Inflation and Growth Conditions mean for Monetary Policy?
Inflation has seen a significant moderation from the highs of the summer of 2022. Over the last two years, monetary policy has prioritized inflation over growth, undertaking a calibrated increase in policy repo rate by 250 basis points and withdrawal of stimulus measures. Monetary policy was supported by pro-active supply-side measures by the government. That said, the job is not yet finished, and we need to be vigilant about new supply shocks that may undo the progress made so far.
Headline inflation has remained high and has seen considerable volatility, moving in a range of 4.3 percent to 7.4 percent during the current financial year. Recurring food price shocks could interrupt the ongoing disinflation process, with risks that it could lead to the de-anchoring of inflation expectations and generalization of price pressures. Adding to these are the renewed flash points on the geo-political front, including supply chain disruptions.
Importantly, the CPI inflation target of 4.0 percent is yet to be reached. Monetary policy, in the midst of these lingering uncertainties, has to remain vigilant to ensure that we successfully navigate the last mile of disinflation. Stable and low inflation at 4 percent will provide the necessary bedrock for sustainable economic growth.
Liquidity and Financial Market Conditions
After remaining in surplus during April-August 2023, system-level liquidity turned into a deficit from September after a gap of four and half years. Adjusted for government cash balances, potential liquidity in the banking system is still in surplus. During December-January, the Reserve Bank proactively injected liquidity through both the main and the fine-tuning repo operations to ease liquidity tightness in the system. With government spending picking up and augmenting system-level liquidity, the Reserve Bank undertook six fine-tuning variable rate reverse repo (VRRR) auctions during February 2-7, 2024 to absorb surplus liquidity.
Financial market segments have adjusted to the evolving liquidity conditions to varying degrees. While the short-term rates have fluctuated, long-term rates have remained relatively stable, reflecting better anchoring of inflation expectations as indicated in the softening of the term spread in the G-sec market. In the credit market, monetary transmission remains incomplete.
Let me reiterate that our policy stance is in terms of interest rate which is the principal tool of monetary policy in the current framework. Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4 percent and our efforts to bring it back to the target on a durable basis. So far as liquidity conditions are concerned, these are being driven by exogenous factors, which are likely to correct in the foreseeable future, aided by our market operations.
On our part, the Reserve Bank remains nimble and flexible in its liquidity management through two-way main and fine-tuning operations, in both repo and reverse repo. We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity to ensure that money market interest rates evolve in an orderly manner and financial stability is maintained. The reversal of liquidity facilities under both SDF and MSF even during weekends and holidays, announced in our December policy statement, has facilitated better funds management by the banks.
As of February 7, 2024, the Indian rupee (INR) has remained stable compared to both its emerging market peers and a few advanced economies. In terms of coefficient of variation (CV), the INR exhibited the lowest volatility in 2023-24 (April to January) compared to the corresponding period in the previous three years.
Let me reiterate that the exchange rate of the Indian rupee is market-determined. Its relative stability in the recent period, despite a stronger US dollar and elevated US treasury yields, reflects the strength and stability of the Indian economy, its sound macroeconomic fundamentals, financial stability, and improvements in India’s external position, particularly the significant moderation in the current account deficit (CAD), comfortable foreign exchange reserves and return of capital inflows.
Financial Stability
The domestic financial system remains resilient with healthy balance sheets of banks and financial institutions. The financial parameters of non-banking financial companies (NBFCs) are also improving in tandem with those of the banking system. Good Governance, robust risk management, sound compliance culture, and protection of customers’ interests are of paramount importance for the safety and stability of the financial system and individual institutions. The Reserve Bank lays great emphasis on these aspects. We expect all regulated entities to accord the highest priority to these functions.
External Sector
India’s current account deficit (CAD) declined sharply to 1.0 percent of GDP in Q2:2023-24 from 3.8 percent in Q2:2022-23. Going ahead, the net balance under services and remittances is expected to remain in large surplus, partly offsetting the trade deficit. India’s services exports remained resilient in October-December 2023, driven by software, business, and travel services. Moreover, with around 10.2 percent share in world telecommunications, computer and information services exports, India is a significant player in the world software business. According to the World Bank, with an estimated US$135 billion in inward remittances in 2024, India would remain the largest recipient of remittances globally. Thus, the CAD for 2023-24 and 2024-25 is expected to be eminently manageable.
On the financing side, net foreign direct investment (FDI) stood at US$ 13.5 billion in April-November 2023 as compared with US$ 19.8 billion a year ago. Foreign portfolio investment (FPI) witnessed a sharp turnaround during 2023-24 (up to February 6) with net FPI inflows of US$ 32.4 billion as against net outflows of US$ 6.7 billion a year ago. Net accretions to non-resident deposits and net inflows under external commercial borrowings were also higher during the year. As of February 2, 2024, India’s foreign exchange reserves stood at US$ 622.5 billion. Vulnerability indicators suggest greater resilience of India’s external sector. We are confident of comfortably meeting all our external financing requirements.
Additional Measures
I shall now announce certain additional measures.
Review of the Regulatory Framework for Electronic Trading Platforms (ETPs)
The Reserve Bank’s extant regulatory framework for electronic trading platforms (ETPs) was issued in 2018. Because of the subsequent developments in markets, products, technology, etc., a revised regulatory framework for ETPs will be issued for stakeholders’ feedback.
Hedging of Gold Price Risk in the Over-the-Counter (OTC) Market in the International Financial Services Centre (IFSC)
In December 2022, the Reserve Bank permitted resident entities to hedge their gold price risk in recognized exchanges in the IFSC. It has now been decided to also allow resident entities to hedge the price of gold in the over the counter (OTC) segment in the IFSC. This will provide more flexibility to resident entities in hedging their exposure to gold prices.
Key Fact Statement (KFS) for Retail and MSME Loans & Advances
At present, the loans and advances availed by borrowers, apart from including the rate of interest; also include other charges such as processing fees, documentation charges, etc. To enhance transparency in the disclosure of such information, the Reserve Bank had mandated certain categories of lenders to provide the borrower a Key Fact Statement (KFS) containing essential information such as the all-inclusive annual percentage rate (APR) and recovery and grievance redress mechanism. The requirement of KFS is now being extended to cover all retail and MSME loans. This measure will lead to enhanced transparency in lending and enable customers to make informed decisions.
Enhancing the Robustness of AePS
Aadhaar Enabled Payment System (AePS) has played an important role in financial inclusion by enabling customers to make digital payment transactions through service providers such as business correspondents. Given their significance, it is proposed to streamline the process for onboarding AePS service providers and introduce some additional fraud risk management measures. These measures will further strengthen the security of the AePS system and enhance its robustness.
Principle-Based Framework for Authentication of Digital Payment Transactions
Over the years, the Reserve Bank has proactively facilitated the introduction of various mechanisms such as Additional Factor of Authentication (AFA) for securing digital payments. While no particular mechanism was specified by the Reserve Bank, SMS-based OTP has become very popular. With technological advancements, however, alternative authentication mechanisms have emerged in recent years. Therefore, to facilitate the adoption of alternative authentication mechanisms for enhancing the security of digital payments, it is proposed to put in place a principle-based framework for the authentication of such transactions.
Introduction of Programmability and Offline Functionality in Central Bank Digital Currency (CBDC) Pilot
The CBDC Retail (CBDC-R) pilot currently enables Person to Person (P2P) and Person to Merchant (P2M) transactions. It is now proposed to enable additional functionalities of programmability and offline capability in CBDC retail payments. Programmability will facilitate transactions for specific/targeted purposes, while offline functionality will enable these transactions in areas with poor or limited internet connectivity.
Conclusion
The Indian economy is making confident progress on a strong, sustained, and transformative growth path. Domestic and international investors are reposing greater confidence in India’s economic prospects. In our assessment, the current setting of monetary policy is moving in the right direction with growth holding firm and inflation trending down to the target. Therefore, much has been achieved, but we must remain vigilant. Policymaking during uncertain times has to be based on a continuous assessment of the incoming data and its implications for the evolving outlook.
We reaffirm our commitment to bring down inflation to the target of 4 per cent in a timely and sustainable manner. Price and financial stability are the foundations for strong, sustainable, and inclusive growth. Our endeavor all along has been to take a holistic approach to keep the economy in balance. We must not only preserve the hard-earned strength and stability of the Indian economy but also build on this further for a long haul of higher growth with price and financial stability. In the current environment, what Mahatma Gandhi said long ago remains relevant and I quote: “I am moving cautiously, watching myself at every step. ….. but there is the fixed determination behind every act of mine…”
RBI Governor’s Address Foot Notes: Financial data
· According to the latest update of the World Economic Outlook (WEO) of the IMF released on January 30, 2024, global growth is expected to remain steady at 3.1 percent during 2024, the same as in 2023
· As per the latest WEO of the IMF, world trade volume (goods and services) growth is expected to accelerate to 3.3 percent in 2024 from 0.4 percent in 2023
· As per the latest WEO of the IMF, world consumer price inflation is expected to moderate to 5.8 percent in 2024 from 6.8 percent in 2023
· According to the IMF, the gross public debt to GDP ratio of Advanced Economies (AEs) is projected to increase from 104.1 percent in 2019 to 112.1 percent in 2023. For Emerging Market Economies (EMEs), the gross public debt to GDP ratio is estimated to increase from 55.9 percent in 2019 to 68.3 percent in 2023 (Fiscal Monitor, October 2023)
· According to the IMF, the general government debt of India increased to 88.5 percent of GDP during the pandemic year 2020. This has come down to 81 percent of GDP in 2022 and is projected to decline to 80.5 percent in 2028 (IMF Fiscal Monitor, Oct 2023)
· GDP expanded by 9.1 percent and 7.2 percent in 2021-22 and 2022-23, respectively. On the supply side, the enhanced contribution from the manufacturing sector and sustained buoyancy in construction activity and other services led to a growth of 6.9 percent in gross value added (GVA) for 2023-24. Manufacturing expanded by 6.5 percent while the construction sector registered double-digit growth of 10.7 percent, respectively, during 2023-24
· The northeast monsoon ended with 9 percent below long-period average (LPA) rainfall. At the all-India level, the water storage position at 52 percent of total reservoir capacity as of February 1, 2024, is lower by 17.3 percent over the last year and 2.8 percent over the decadal average
· As of February 2, 2024, Rabi sowing has surpassed last year’s level and was higher by 5.2 percent over the normal 5-year average acreage. The acreage of wheat, oilseeds, and coarse cereals has exceeded that of last year’s level by 0.7 percent, 1.1 percent, and 7.1 percent, respectively
· As per the 3rd AE (released on January 18, 2024), the production of horticultural crops during 2022-23, driven by higher production of fruits and vegetables, is placed at a record 355.3 million tonnes, 2.3 percent higher than the final estimate of 2021-22. With record fish production of 175.45 lakh tons in 2022-23 (162.48 lakh tonnes in 2021-22), India is the third largest fish-producing country in the world accounting for 8 percent of global production and contributing over 6.7 percent to the agricultural gross value added (GVA)
· The index of industrial production (IIP) for manufacturing posted a growth of 5.6 percent during October-November, while core industries recorded a robust growth of 7.8 percent during Q3
· The early results of 494 listed manufacturing companies suggest GVA in nominal terms expanded by 15.4 percent y-o-y driven by an increase in gross profits by 16.8 percent
· PMI manufacturing increased to 56.5 in January from 54.9 in December and remained above the long-run trend. Business expectations, measured by the future activity index over 12 months, strengthened to a 13-month high in January, boosted by increased new inquiries and product diversification, and robust demand
· E-way bills and toll collections increased by 17.1 percent and 12.8 percent, respectively, in Q3 2023-24, while port cargo rose by 10.1 percent during this period. Railway freight traffic expanded by 6.4 percent both in Q3 and January 2024. Goods and services tax (GST) collections growth accelerated to 12.9 percent in Q3 2023-24 from 10.6 percent growth in the preceding quarter. GST collections expanded by 10.4 percent y-o-y to ₹1.72 lakh core in January to record second highest collection ever
· PMI services rose to 61.8 in January 2024 from 59.0 in December 2023, with the rate of expansion picking up to a six-month high
· The central government’s capital expenditure recorded a growth of 37.5 percent in April-December 2023, on top of 25.1 percent growth during the same period last year. Steel consumption rose by 14.5 percent, while cement production increased by 4.5 percent during Q3
· According to the Periodic Labour Force Survey (PLFS), the urban unemployment rate has been secularly declining from 9.8 percent in Q2: 2021-22 to 7.2 percent in Q2:2022-23 and further to 6.6 percent in Q2:2023-24
· Two-wheeler sales expanded by 22.6 percent during Q3:2023-24, while tractor sales contracted by 4.9 percent during this period
· Mahatma Gandhi National Rural Employment Guarantee Act or MGNREGA work demand declined by 5.5 percent in December 2023 and 4.8 percent in January 2024
· According to the press release issued on November 29, 2023, the Central government will provide free food grains to about 81.35 crore beneficiaries under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) for five years with effect from 1st January 2024, aimed at ensuring food and nutrition security
· Domestic air passengers’ traffic expanded by 9.1 percent while passenger vehicle sales posted a growth y-o-y of 8.3 percent in Q3 2023-24. Early corporate results suggest that the staff cost of listed manufacturing companies increased by 11.0 percent in Q3: 2023-24
· Capital expenditure in BE 2024-25 increased to ₹11.1 lakh crore (3.4 percent of GDP), an increase of 16.9 percent over ₹9.5 lakh crore in RE 2023-24 and 11.1 percent over ₹10.0 lakh crore in BE 2023-24
· Final results suggest capacity utilization increased by 40 bps to 74.0 percent in Q2: 2023-24. The long-term average is 73.7 percent which pertains to the period Q1:2008-09 to Q2:2023-24 excluding Q1:2020-21. Seasonally adjusted CU, however, declined by 90 bps and stands at 74.5 percent in Q2:2023-24
· As of January 12, 2024, the total flow of resources to the commercial sector from banks and other sources at ₹23.6 lakh crore during the current financial year so far is significantly higher than that of last year (₹19.8 lakh crore)
· Investment under the PLI scheme has already matured to the extent of ₹1.03 lakh till November 2023 so far
· This was primarily driven by key industries such as steel, petroleum, textiles, power, chemicals, food processing, and construction
· Merchandise trade deficit declined to US$ 70.5 billion in Q3 from US$ 71.5 billion during the same quarter last year
· As headline inflation edged up to 5.7 percent in December from a low of 4.9 percent in October, CPI food inflation increased to 8.7 percent in December 2023 from 6.3 percent in October. The pick-up in food inflation since November was primarily driven by vegetables along with fruits, pulses, and sugar
· In December, CPI excluding food and fuel inflation moderated in eight of the 10 sub-groups/groups and remained steady in the remaining two. Inflation moderated in sub-groups/groups such as clothing and footwear, health, transport and communication, education, personal care, and effects, among others
· Headline inflation was 4.3 per cent in May 2023 and 7.4 per cent in July 2023
· System-level liquidity is measured by the difference between liquidity absorption and liquidity injection under the liquidity adjustment facility (LAF). Liquidity absorption under LAF includes reverse repos (main as well as fine-tuning operations) and standing deposit facility (SDF). Liquidity injection under LAF includes repos (main as well as fine-tuning operations) and marginal standing facility (MSF). In other words, System level liquidity = [(Reverse repos +SDF) – (Repo + MSF)]. A net positive number represents system surplus level liquidity, while a net negative number represents system level deficit liquidity
· The system level liquidity deficit widened from an average of ₹0.42 lakh crore during September-November 2023 to ₹1.61 lakh crore during December-January
· Between December 15, 2023 – January 31, 2024, nine fine-tuning variable rate repo (VRR) operations of 1-7 days maturity were conducted amounting to ₹7.75 lakh crore, while two main VRR operations injected ₹4.25 lakh crore into the system
· The Reserve Bank conducted two 4-day VRRR auctions of ₹50,000 crore each on February 2 and February 5, 2024, respectively. In addition, two 1-day VRRR auctions of ₹75,000 crore and ₹50,000 crore were conducted on February 6, and two 1-day VRRR auctions of ₹50,000 crore each on February 7, 2024. Thus, against a total notified amount of ₹3,25,000 crore, the amount absorbed through these auctions was ₹1,53,915 crore
· During December-January, the average term spread (10-year minus 91-day Treasury Bills) softened to 24 basis points (bps) from 40 bps in October-November
· The weighted average lending rate (WALR) on fresh rupee loans rose by 181 bps while that on outstanding loans rose by 113 bps during the current tightening cycle (May 2022 – December 2023). During the same period, the weighted average domestic term deposit rates (WADTDR) on fresh deposits and outstanding deposits rose by 246 basis points and 180 bps, respectively
· This has indeed been reflected in the behavior of banks with lower placement of funds under the SDF and lower recourse to the MSF on Fridays since December 30. Average placement of funds under the SDF and funds availed under the MSF have moderated to ₹0.64 lakh crore and ₹0.38 lakh crore, respectively, during the Fridays since December 30 (up to February 2, 2024) as compared with ₹0.70 lakh crore and ₹0.86 lakh crore, respectively, in the Fridays since the beginning of December
· As of February 7, 2024, the depreciation of the Indian rupee (INR) at 0.9 percent against the US dollar on a financial year basis is lower as compared to emerging market peers like the Chinese yuan, Thailand baht, Indonesian rupiah, Vietnamese dong and Malaysian ringgit and a few advanced economy currencies like the Japanese yen, Australian dollar, Korean won and New Zealand dollar
· For the period April to January, the coefficients of variation (CV) of the INR were 1.4 percent, 1.0 percent, 2.7 percent, and 0.6 percent for the years 2020-21, 2021-22, 2022-23 and 2023-24 respectively. For the period April to January 2022-23 and 2023-24, the INR was one of the least volatile in terms of CV among various peer EME currencies including the Chinese yuan, the Thailand baht, the Indonesian rupiah, and the Malaysian ringgit
· The key indicators of capital and asset quality of scheduled commercial banks (SCBs) improved further as of the end of September 2023. The capital adequacy ratio (CRAR) and the liquidity coverage ratio (LCR) of SCBs were well above the regulatory threshold. The CRAR ratio of SCBs stood at 16.8 per cent in September 2023. The LCR of SCBs was comfortable at 135.4 per cent, much above the minimum stipulation of 100 per cent. SCBs’ gross non-performing assets (GNPA) ratio and the net non-performing assets (NNPA) ratio declined to a multi-year low of 3.2 percent and 0.8 percent, respectively, in September 2023.
· The resilience of the NBFCs sector improved with CRAR at 27.6 percent, GNPA ratio at 4.1 percent and return on assets (ROA) at 2.9 percent, respectively, in September 2023
· India’s services exports grew by 5.1 percent on a y-o-y basis during October-December 2023
· India’s rising software and business services exports through Global Capability Centres (GCCs) are a testament to its growing dominance in high-skilled and high-value services exports. Riding on the wave of big data, Artificial Intelligence (AI), Machine Learning (ML), Internet of Things (IoT), and advancements in compatible hardware, generative AI, and spatial computing opens up newer dimensions for Indian software exports
· According to the World Bank, India’s inward remittances will rise by 8.0 percent in 2024. India’s share is around 15 percent of the global inward remittances
· Net inflows were lower during April-November 2023 due to higher repatriation at US$ 25.6 billion as against US$ 19.9 billion during the same period last year. Gross inward FDI was marginally lower at US$ 47.0 billion during April-November 2023 as against US$ 49.0 billion during the same period last year
· Net accretions to non-resident deposits increased by US$ 7.3 billion during April-November 2023 from US$ 3.6 billion a year ago, led by higher inflows in NRE and FCNR(B) accounts. Net inflows of ECBs to India were US$ 1.6 billion during April-December 2023 as against net outflows of US$ 5.9 billion a year ago
· The Foreign exchange Reserves cover more than ten months of projected imports for 2023-24 and 97.1 percent of total external debt as of end-September 2023
· India’s external debt/GDP ratio fell from 20.0 percent in the end of March 2022 to 18.6 percent in the end of September 2023. The debt service ratio increased from 5.2 per cent to 6.7 per cent during the same period
Highlights of opening statement by RBI Governor Das: 8th Feb’24
· Domestic economic activity continues to be strong. We expect the real GDP to grow by 7% in the next financial year 2024-25.
· CPI inflation is moderating with intermittent interruptions and spikes. We have to remain vigilant about the incoming data and the outlook. Our endeavor to achieve 4% inflation on a durable basis has to continue.
· Globally, markets are front-running central banks in anticipation of policy pivots. But central banks remain apprehensive and await a more durable alignment of inflation with targets
· Liquidity will be actively managed by the Reserve Bank
· Our multi-pronged proactive and calibrated policies have worked well to maintain and strengthen macroeconomic and financial stability
· Systemic, sectoral, and institution-specific signs of stress are being proactively monitored and acted upon wherever necessary
· Let me reiterate that good governance, robust risk management, sound compliance culture, and protection of customers' interests are the hallmarks of the Reserve Bank's approach to the safety and stability of the financial system and individual financial institutions. Regulated entities must accord the highest priority to these aspects
· The external sector of the economy remains resilient. The current account deficit is expected to be eminently manageable
· The exchange rate of the Indian rupee has remained stable
Highlights of RBI MPC Presser and Q&A (RBI Governor Das and Dy. Gov. Patra): 8th Feb’24
· RBI is actively managing overall banking/system liquidity by both injection and absorption as per ground/evolving situations to keep the weighted average call rate around the repo rate, which is the policy objective
· “---the stance is all about the future course of policy rates. Now, liquidity is endogenous to the rate. When the rate is the chief instrument of Monetary Policy, liquidity follows the rate. You have to move liquidity to achieve a certain rate. Our objective is to keep the weighted average call rate around the repo rate. But there are times when there are temporary drivers of autonomous liquidity, like Government balances, which go through tectonic shifts, and market participants take time to adjust even if they are unsure of the future direction of this. So, that is why sometimes the call rate goes to where it went, but you saw that we were nimble in our actions, and we brought it down to the repo rate. That is our endeavor.”
· RBI's stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4% and our efforts to bring it back to the target on a durable basis
· “As far as the transmission is in a hiking phase as we have always seen in the past, the rates on the deposit side reset much faster and they get passed on, and as we have seen, deposit rates have almost played out. While on the lending side, it does take time to pass for two major reasons in our assessment. One is that the proportion of loans that are benchmarked externally, what we call EBLR-linked loans is still less than 50%. Where the transmission could be instant is only where the EBLR comes into play”
· “In the case of other instruments, other benchmarks like MCLR, base rates, or fixed rate loans, it does take time to transmit. That is the precise reason, why we still see that transmission is fully not in place. Secondly, in the hiking phase, we have seen banks' anxiety about maintaining their market share in the incremental credit, also adjusting their margins so as not to lose their market share in the incremental credit and that also impedes the complete transmission in terms of the effective interest rate.”
· RBI acting on PayTM after exhausting all options through various discussions
· Borrowers should opt for a floating interest rate option to get a changing
· There is no lack of coordination between RBI and the Government in managing public debt
· The FY25 real GDP growth projection is around +7.0% against nominal GDP growth of +10.5%; the estimated GDP deflator of 3.5% is a weighted combination of CPI and WPI
· RBI is not in a position right now for any specific forward guidance (like shifting to neutral mode and subsequent rate cuts cycle) as RBI is confused about various commentaries coming out from major global central banks (Fed/ECB)
· “I cannot give forward guidance on that. When such a thing happens, we will explain how it is. But, I will tell you the situation; the evolving situation continues to be very volatile and uncertain. You look at the commentaries coming out from the central banks, mostly of advanced countries. Sometimes they appear to be giving forward guidance in one particular direction. Sometimes the market interprets the next guidance to be in a different direction. At the moment, we are not giving any forward guidance with regard to stance or rate”
· RBI thinks that the global market is running ahead of central banks on rate cut/pivot issues
· “There is a talk of when the central banks world over will cut rates and as I have said, markets are running ahead of the central banks. So, preconditions, I will not be able to specify, unless DG Michael Patra wants to comment anything on that. Because these are very volatile times. So, it is better to wait and when something like that happens, we will explain it appropriately”
· RBI will change its stance at an appropriate time with a suitable explanation (narrative)
· RBI is not overly concerned about the exponential growth of unsecured personal loans, but as a regulator is cautious and took some proactive actions/regulatory steps
· I want to assure everyone that India's financial sector, the banking sector, and the overall financial system are very strong. There is no doubt about it whether it is a banking or non-banking finance company, NBFC if you see the performance of any of these and if you see the overall parameters at the systemic level or individual level parameters are strong. Growth is very sound and there is good momentum for growth.
· But as a supervisor, as a regulated entity, we keep supervising it, and in every supervision; our effort is that whatever supervised entity whether it is a bank, NBFC, or any other financial institution, we directly engage with them. We talk to them directly and we say that this is where you are lacking, and here you have done regulatory violation and do the rightful thing. You take your banks or NBFCs in the right direction. According to our regulatory guidelines, some deviations are happening, you correct those and take the right steps. For that, we give a lot of time as well
· Indian banking & financial sector is robust despite some regulatory issues with PayTM
· I am talking in a general sense and not about a specific single entity and where the action is not being taken promptly or if we do not see an effective action there in the public interest, in customer interest, in depositors'' interest, and overall financial system’s interest it; becomes necessary to take certain measures. We take those measures because the Reserve Bank is the custodian of financial stability and financial systems. The Reserve Bank has always been committed and will be committed going forward and as you said, it is standing strong. So yes, the Reserve Bank is standing strong
· RBI is concerned about elevated public debt levels of some AEs; RBI is not very concerned about India’s level of public debt or that of EMs
· I was raising this issue in a global context, not in the context of India. The India part of the information I have given is just by the way of information. My reply was in the global context. You see the footnotes of my Monetary Policy Statement. All the supporting data is given. By the end of this decade, global debt to GDP of EMEs, and advanced economies all put together is expected to exceed 100%.
· On today's date and in the future, very surprisingly, you will notice that the debt to GDP of the advanced economies is much higher than the debt to GDP levels of the EMEs. Many advanced economies, where the fiscal deficit is very high in the range of 7-8% of the GDP will keep on borrowing. When they borrow in reserve currency then what you call it creating new money, printing notes. The debt has to be sustainable for the long-term stability of the global financial system. So, I have raised this as an issue that can become a future source of stress to the global financial system
· As far as India is concerned, please look at my statement again, I have provided the data in the footnote. The IMF’s Fiscal Monitor gives out data for India. The debt to GDP for India had gone up to 88%, General Government, i.e., the Centre and States together, had gone up to 88% during the COVID year of 2020 because of the various fiscal measures that were undertaken. It has already come around about 81% and by 2028, according to the IMF's Fiscal Monitor; it is expected to be around 80%. That is the path, which I just mentioned by way of information
Conclusions:
On 8th February, 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%. But this time RBI holds the rate with the continuing removal of accommodation with 5-1 MPC votes as ‘always rebel/contra’ MPC Member Varma voted for a rate cut of -25 bps and opposed the so-called removal of accommodation stance of RBI.
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 below target +4.0% so that real rate of interest is kept at an appropriate restrictive level even after some cuts.
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.
On 12th Feb, data shows India’s headline/total CPI at +5.1% in Jan’24 against +3.6% core CPI. Overall, 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 leakages/corruption, higher liquidity, higher wage inflation, higher demand (vicious cycle), and various supply disruptions from local weather, logistics and geopolitics.
Simply put, the present supply capacity of the Indian economy is much 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 +3.50% or even below that on average for 2024. Thus RBI may cut rates from Aug’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 shift to neutral mode in Apr’24 meeting and start to cut rates from Aug’24, if Fed starts the same from July’24:
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.
Ahead of the general election, the Modi Admin/Government/RBI is now more cautious on the inflation front rather than overall economic growth or unemployment levels. Thus RBI may not take any risk by ‘pre-mature’ tightening before the Fed, which may cause an abrupt appreciation of USDINR, causing a higher imported inflation spike just ahead of the all-important general election, in which PM Modi is set to return with a thumping victory.
Accordingly, RBI may officially indicate the end of the present tightening cycle in the April meeting and shift to neutral mode (just ahead of the election). 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 6M core CPI dips well below +4.0% by then on average). 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 (hawkish) about still elevated inflation.
In India, the government does not publish regular unemployment/employment situation, core inflation, and retail sales data unlike major G20 economies/AEs (U.S./Europe/China/Japan etc). Although RBI is now actively pointing to lower core CPI, RBI, as well as the Government is almost silent about India’s overall unemployment rate elevated around 8% on average (as per private data-CMIE), sky-rocketing youth unemployment (around 45% ??), under-employment and also growing income inequality.
India’s real GDP has grown only to $2.08T from $2.00T between FY19-24 amid higher inflation and continuing currency devaluation. India needs to grow around 10% in real GDP (USD) terms for the next 25 years to compete with China by 2050, which has a real GDP of around $18T against the US’ $20T (for CY22). Thus RBI/Government has to ensure lower inflation, lower borrowing costs, higher domestic income, higher tax revenue, and limited currency devaluation for a double-digit sustainable and inclusive real economic growth for the next 25 years for a developed economy.
India needs to invest much more in traditional and social infra (transport-railways, roadways, airports, and other infra coupled with quality hospitals/medicare and schools/colleges/education). Presently, India is employing around 15% of real GDP as infra CAPEX (cumulative-Federal +State +Private-PPP), which should be at least 30% of real GDP for the next 25 years to increase supply capacity of the economy and income of general households for higher domestic consumption. India also needs to reform its tax, energy, raw material and various regulation policies for a global manufacturing powerhouse to compete with various SE/SA countries and China. Also, India needs to invest at least 10% of real GDP; i.e. around Rs.17-20T (instead of the present Rs.1T) for research & innovation to be the inventor of original product/tech, not a replicator.
Bottom line:
Thus RBI has to ensure price stability, financial stability, currency stability, economic growth stability, and also lower borrowing costs for the government, so that India becomes a developed 3rd largest economy by 2047-50 in terms of real GDP (USD terms).
Now, ahead of the election, RBI may not take any undue risk by cutting rates prematurely ahead of the Fed, causing higher USDINR and higher imported inflation, everything being equal. RBI may shift to neutral mode in April and go for rate cuts from Aug’24, if the Fed goes for the same from July’24.
Whatever the narrative, technically Nifty Future (21925) now has to sustain over 22200/22300* for a further rally to 22450/22675-22850/23025 and 23260-23575 levels in the coming days; otherwise sustaining below 22150/22100-22000/21900 levels, may fall to 21800/21550*-21475/21250, and 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.
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
ALL DATA FROM THE ORIGINAL SOURCE
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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