The first monetary policy of FY2025 remained uneventful. The 6-member RBI monetary policy committee (MPC) kept its policy rate as well as policy stance unchanged, with a vote of 5-1, as economic growth remains resilient and inflation eases.
Global growth remains resilient with a stable outlook, though the same is buffeted by head winds from geopolitics. Global Debt-GDP ratios remain elevated and are projected to rise further on increasing cost of financing the debt. Worsening debt ratios in advanced economies (AEs) can generate negative spillovers for EMs (emerging market) through global linkages.
India is in better position on the back of its fiscal consolidation in recent years as well as faster GDP growth. Economic activity continues to accelerate on the back of fixed investment and improving global environment. GDP growth is estimated at 7.6 percent for FY2024. Manufacturing PMIs have shown expansion in Feb-Mar’24, and industrial and service sectors have shown broad based buoyancy. Rural demand is catching up, and we believe that manufacturing and services should boost private consumption in FY2025. Prospects of overall investment activity remain bright, and the private capex cycle is looking broad based. GDP growth is estimated at 7 percent for FY2025.
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Global price pressures have reduced from the highs seen during pandemic. While inflation has fallen in AEs and moves closer to aim, the last mile is proving challenging. The US CPI has dropped to around 3 percent but remains sticky around that level. It may take some time for the US CPI to move towards its aim of 2 percent. This has implications for US monetary policy direction.
While Indian CPI has moderated, it remains higher than medium term target of four percent. Core inflation is around 3.5 percent, but overall CPI inflation remains around 5 percent. This is due to higher food prices. Food price uncertainty continues to weigh on the overall inflation trajectory. A record level of rabi crops should continue to temper inflation going forward. With expectations of normal monsoon, food prices should remain benign. Oil prices have moved higher recently and would require close monitoring. Based on expectation of normal monsoon, the CPI is projected to 4.5 percent in FY2025.
Also read: Strong growth momentum, bright outlook keep MPC focused on price stability
Liquidity conditions eased in Feb-March 2024 on back of increased government spending, and RBI’s money market and forex operations. RBI conducted VRRR (variable reverse repo rate auctions) to manage surplus liquidity and the weighted average call rate hovered near the repo rate. RBI further conducted VRR (variable repo auctions) to manage liquidity tightness. Going forward, the RBI would continue to remain nimble and flexible to manage liquidity through tools available at its disposal.
External sector continues to show improved resilience. USD/INR remained range bound in FY2024 and was one of the most stable currencies in Ems. Service exports and remittances continue to grow at a fast pace. FPI flows exhibited a remarkable turnaround, with inflows of $41.6 billion in FY2024 (net outflows in preceding 2 years). FDI flows were muted and moderated to $ 14.2 billion in Apr’23-Jan’24 ($25 billion a year ago). Forex reserves reached an all-time high of $645.6 billion as of March 2024.
Overall, the MPC outcome was balanced. With growth impetus strong and inflation moderating, the MPC has policy space to focus on price stability and anchor inflation expectations. While most large systematically important central banks have reached the end of hike cycle, the easing cycle may not be coordinated. US growth continues to remain strong, and US FED may not ease in a hurry and extent of rate easing would likely be limited. ECB is likely to cut rates earlier as growth remains a concern in Eurozone.
The first easing from RBI MPC may happen only in 2H FY2025 and extent of rate easing may be limited to 50bps in current fiscal. Bond markets are likely to remain supported as flows from index inclusion in JP Morgan EM Bond index are likely to start from June 24, which is likely to keep demand strong for government bonds. Markets may remain range bound in the near term.
Avnish Jain is Head-Fixed Income at Canara Robeco Mutual Fund.
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