Come on the heels of Union budget 2023 and political announcements from major central banks around the world that recent announcements by the Monetary Policy Committee I guess I played it safe. By deciding to hike rates while continuing to advocate for shelter retreats, the MPC may have reached the end of the road it has taken and paved the way for a sustained period of growth. Interestingly, the RBI has now hiked rates by 250 basis points across six policies. Compare that to the RBI’s 375 basis point rate hike after the global financial crisis, spread across 14 policy statements. This time, the RBI was clearly remarkably nimble and ahead of the curve. And the fall in inflation is visible to all.
In line with broader market sentiment to raise interest rates slightly to meet the final rate, RBI has also made an assignment Growth at 6.4 percent and inflation at 5.3 percent for 2023-24. The sharp upward revision of Q1 2023-24 GDP estimates to 7.8 percent reflects the benefit of a significantly benign inflation rate during the quarter – the WPI is expected to turn negative in May and June 2023, while the CPI is likely to turn lower will be 4.5 percent in April 2023.
A prolonged period of economic uncertainty – the spillover of global events – could not dampen India’s bright prospects. The household announcements must be viewed from this perspective in order to gain any meaningful insight into the scheme of things as they unfold. Capital expenditure as a percentage of GDP is now at an 18-year high. The ratio of revenue deficit to fiscal deficit is at a 17-year low, as is the ratio of subsidies to GDP. These are notable tax changes that global investors should take note of.
Emerging market central banks now appear to be cornered by the US Federal Reserve’s aggressive stance (via the Federal Funds Rate), making it difficult to adopt an opposite monetary policy stance in these troubled times. With the US jobs market remaining resilient, as the latest data shows, it is now becoming increasingly likely that the Fed will continue raising interest rates even beyond March in its fight against inflation. Against this background, there is now a need for a more active debate on the timing and sequencing of monetary policy action by countries around the world, particularly for emerging markets. The exit from current policies should vary from country to country depending on the risks to growth and price stability.
Many are currently pricing in rate cuts by the Fed beginning in late 2023. However, other explanations for monetary policy action in advanced economies must be considered. For example, since the early 1980s, the behavior of asset prices has been a continuing concern for central banks in formulating their monetary policies. The forthcoming monetary policy statement by the RBI in April is therefore of particular importance as to whether it can signal an exit from the previously coordinated monetary policy hikes. Otherwise, central banks in emerging markets could steadily catch up with the US Federal Reserve.
Since April 2020, we have found that synchronized rate action has resulted in increased market volatility, with spreads between the two jurisdictions narrowing. Non-synchronous monetary policy actions in 2023 are therefore justified for lower volatility. In the current cycle, deposit rates have converged more towards the reference rate, while lending rates have experienced weaker transmission. This is also reflected in the strong credit growth we have seen across all industries in the recent post-pandemic period. The next year should see strong credit demand from established as well as emerging and emerging sectors as formalization and financialization gain momentum through policy action and regulatory forbearance. But we also need to ensure that credit growth remains buoyant, for which pricing could be an effective factor.
Fortunately, there are other factors that enable credit growth as well. According to conservative estimates, India would need approximately US$10 trillion in related investments to meet its net-zero commitments by 2070. Therefore, the role of banks in attracting additional investment and in establishing a broad framework for recognizing and addressing appropriate risk-related parameters for financial firms will be sacrosanct to ensure that markets evolve gradually. In addition, moves towards cash flow-based financing, streamlining debt collection and easing MSME financing restrictions, and aligning TReDS with solutions to strengthen MSME financing should make a major contribution to lending to MSMEs.
Finally, India’s G20 presidency also opens up new prospects for partnerships with like-minded countries and gives us some great platforms to capitalize on our technological leadership in niche areas such as UPI, RuPay and DBT mechanisms, which are being hailed as export-grade digital public goods World. UPI’s seamless integration with various payment mechanisms and its willingness to onboard CBDC (retail) should get a boost from the proposed efforts in G20 countries. Given all these positives, the propensity of certain foreign institutions to project India’s growth estimates is puzzling to say the least – from drifting to extremes to irrational exuberance and plunging into an abyss of unwarranted pessimism. In these uncertain times, a balanced and level-headed assessment is required.
The author is Group Chief Economic Advisor to the State Bank of India. Views are personal
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