The pandemic’s disruption of the Indian economy and the current geopolitical scenario has posed its set of challenges to the global economy. The macroeconomic challenges have continued in recent times with the hike in global crude oil prices, the geopolitical environment, and continued supply side disruption which has further led to the inflation remaining high. As such, the World Bank recently cut its forecast for the global economic growth, and warned of stagflation risks. Also, globally the central banks are hiking interest rates.
In India, the Reserve Bank of India (RBI) in May surprised us with an off-policy rate hike, thus signalling the rise in the interest rates in the economy. On expected lines, on June 8, the RBI hiked the repo rate further by 50 bps, and its monetary policy committee will be focused on ‘withdrawal of accommodation’ in order to keep the inflation within the set limit, all the while supporting growth.
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The RBI has hiked the FY23 inflation forecast to 4.7 percent. Inflation has dampened the purchasing power of people, and given the ongoing challenges with regards to inflation, it has become imperative for the RBI to focus on overall macroeconomic stability.
Given the rise in inflation is largely attributed to supply side disruption, global crude oil prices and geopolitical environment, we are seeing both the RBI and the government taking steps to tame inflation. The RBI has been taking measures to tame excess system liquidity while the government is managing inflation by reducing tax on petroleum products, and restricting the exports of essential commodities.
With the off-cycle hike in May, along with the June 8 rate hike, the repo rate has seen a cumulative hike of 90 bps. There are expectations of the RBI further hiking the interest rate to the pre-pandemic levels. With the money market rates rising and banks hiking rates, the borrowing cost for NBFCs and corporates is likely to go up.
While rising inflationary expectations continue to pose a challenge, it was heartening to see the RBI foreseeing a pickup in the investment activity in the economy. The RBI also retained FY23 GDP forecast at 7.2 percent. The government’s push on capex, paired with the rising capacity utilisation and deleveraged corporates are likely to aid pick up in the investment activity. We are also seeing signs of improvement in many high-frequency indicators. The urban demand is recovering and rural demand too is improving. The expectation of a normal monsoon is likely to support the rural demand, which will further support overall economic growth. The credit given by commercial banks has seen an increase of a good 8.8 percent by the end of May, 2022. India’s foreign exchange reserves were seen to be at slightly over $600 billion as of end May, 2022. A clear sign that we are doing much better since the pandemic disrupted our lives.
The overall economy is gradually recovering, the demand for gold loans has been steady, and may remain so for this financial year. Nevertheless, the RBI’s further rate hike will depend on the evolving growth-inflation dynamics.
George Alexander Muthoot is MD, Muthoot Finance. Views are personal, and do not represent the stand of this publication.
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