Coming on the heels of the 2023 Union Budget and policy announcements by major central banks across the world, the monetary policy committee’s recent announcements have probably erred on the side of caution. In choosing to hike rates, while remaining committed to the withdrawal of accommodation, the MPC may have reached the end of the path it has been on, paving the way for a sustained period of growth. Interestingly, the RBI has now raised rates by 250 basis points over six policies. Contrast this with the interest rate hike of 375 basis points by RBI post the global financial crisis, which was spread over 14 policy statements. Clearly, the RBI has been remarkably nimble and ahead of the curve this time around. And the decline in inflation is there for everyone to see.
In line with the wider market sentiments on increasing interest rates marginally to reach the terminal rate, RBI has also pegged growth at 6.4 per cent and inflation at 5.3 per cent for 2023-24. The sharp upward revision in the first quarter GDP estimates for 2023-24 to 7.8 per cent reflects the benefit of a significantly benign inflation rate during the quarter – WPI is expected to turn negative in May and June 2023 while CPI is likely to fall to less than 4.5 per cent in April 2023.
A prolonged period of economic uncertainty — the spillover from global events — has not been able to dent India’s bright prospects. The announcements in the budget need to be seen from this perspective to get meaningful insight into the scheme of things as they unfold. The capital expenditure to GDP ratio is now at an 18-year high. The revenue deficit to fiscal deficit ratio is at a 17-year low, as is the subsidy to GDP ratio. These are remarkable fiscal changes, which global investors should take notice of.
Central banks in emerging markets now seem to be cornered by the aggressive stance of the US Fed (through the federal funds rate), which makes taking a contrary monetary policy stance in these troubled times a difficult proposition. With the US job market continuing to remain resilient, as the latest data shows, it is now increasingly likely that the Fed will continue its rate hike even beyond March in its war against inflation. Against this background, there is now a need for more active debate on the timing and sequencing of the monetary stances by countries around the world, specifically for emerging economies. The exit from the current policy should differ across countries, 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 actions in developed economies need to be factored in. For instance, since the early 1980s, the behaviour of asset prices has posed a continuing concern for central banks in their formulation of monetary policy. The upcoming monetary policy statement of RBI in April thus assumes special significance on whether it can signal an exit from the coordinated monetary policy increases so far. Not doing so could mean that central banks in emerging economies will continuously play catch up with the US Fed.
Since April 2020, we have found that synchronised rate actions have resulted in increased market volatility, with spreads between the two jurisdictions declining. Non-synchronous monetary policy action in 2023 is, therefore, warranted for lower volatility. In the current cycle, deposit rates have been more aligned with the benchmark rate, while lending rates have witnessed softer transmission. This also reflects in the strong credit growth that we have seen in the recent post-pandemic period across all verticals. The next year should witness strong credit demand from established as well as sunrise and emerging sectors as formalisation and financialisation gather steam through policy measures and regulatory forbearance. But, we also need to ensure that credit growth continues to be buoyant, an effective enabler of which could be pricing.
Fortunately, there are also other enablers of credit growth. India would, on conservative estimates, need somewhere close to $10 trillion in related investments to achieve its commitments to attain net zero by 2070. Thus, the role of banks becomes extremely significant to achieve incremental investments, and for setting a broad framework for recognising and addressing suitable risk-related parameters for financial entities will be sacrosanct to ensure markets evolve gradually. Additionally, steps taken towards cash-flow based financing, streamlining receivables receipt and easing the funding constraints of MSMEs, aligning TReDS with solutions to bolster MSME financing should go a long way in giving a fillip to lending to MSMEs.
Lastly, India’s G20 presidency also opens new vistas of partnering with like-minded countries and offers us some great platforms to leverage our technological leadership in niche areas like UPI, RuPay and DBT mechanisms, which are being hailed as export-quality digital public goods for the world. The seamless integration of UPI with various payment mechanisms and its readiness to onboard CBDC (retail) should get a fillip through proposed endeavours across G20 countries. Considering all these positives, on balance, the projections bias among certain foreign institutions towards India’s growth estimates is perplexing, to say the least – from sliding towards one extreme to giving into irrational exuberance, and then at times falling into an abyss of unjustified pessimism. A balanced level-headed assessment is required in these uncertain times.
The writer is Group Chief Economic Advisor, State Bank of India. Views are personal
