With inflation cooling and growth in FY23 turning out better than expected, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) may continue to pause any revision in key interest rates at its June 6-8 policy meeting. Prudent fiscal and monetary steps have clearly succeeded in bringing down inflation from its peak of 7 percent to an 18-month low of 4.7 percent in April and raising GDP growth to 7.2 percent in FY23. Focus on capex and manufacturing resulted in higher output that has brought demand-supply equilibrium and led to stable prices.
As projected by the RBI, inflation might soften further in FY24, but at a slow pace. A stable monsoon season and steady crude prices are vital. While urban consumption is positive, the rural economy will have to provide the additional lift to growth without any spike in inflation.
If there is a further rate hike, asset products would become costlier. In the present stable scenario for credit offtake, any hike in rates can result in a significant reduction in individual discretionary spending as well as a freeze in business investments. If there is no change in rates, stable growth in consumption is likely to lead to higher GDP growth. As of now, prices have stabilised which will further induce the growth in domestic demand.
Robust Credit Growth
It continues to be a tightrope walk for the central bank. Credit growth in FY23 has been higher in comparison to the pre-COVID period, despite rate hikes. Multiple factors contributed to this growth. There was a lot of pent-up demand post-Covid and this spiral in discretionary spending led to a higher credit growth in FY23. Here, interestingly, India’s demography has played a role; youth and millennials influenced the credit growth, with their aspirations for big houses, luxury goods, international travel and demand for personal loans, consumer durable loans, credit cards, and education loans among other needs.
There was also a disruption in the credit market by fintech players which offered new products such as buy now pay later and credit EMIs. With attractive product offerings and digital and simplified processes that eased loan disbursements, they brought a large customer segment with no credit history into the credit market, further boosting demand. While FY23 saw a surge in credit growth, the credit market is likely to be more stable or decline in certain product categories in FY24.
Positive News on Macros
Economic parameters are showing positive growth signs for the Indian economy, and this too shall reduce the pressure on the MPC to hike rates. The rupee has been stable in the $81-83 band for the last six months, inflation is easing and the S&P Global India manufacturing PMI is rising. The overall demand is on the higher side while input costs have reduced. A declining unemployment rate coupled with strong service sector-led growth is likely to contribute to good GDP growth.
The FY23 data show the rural economy demonstrating an impressive growth trend. With controlled inflation, prices for commodities and products have eased. Farmers’ incomes have become more stable, leading to higher consumption of big-ticket items as well. Yet, there is the monsoon factor. The average pre-monsoon inflation during the last five years has been 5.51 percent. In comparison, the average post-monsoon inflation during the last five years has been lower at 5.36 percent. In two of the last five years, post-monsoon inflation was lower than pre-monsoon. The IMD has forecast that rainfall during the June-September period to be 96 percent of the long-term average, with an error margin of +/-4 percent. Considering this, post-monsoon inflation might decline even further by September-October.
Virat Diwanji is Group President and Head - Consumer Banking, Kotak Mahindra Bank. Views are personal, and do not represent the stand of this publication.
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