RBI committee faces tough call on repo rate as global growth slows

The rupee free fall
Despite its weakness against the dollar, India's strong fundamentals and strategic policies point towards a promising future for the rupee.

The Reserve Bank of India is about to deliver a pivotal announcement regarding the repo rate amid global economic headwinds as it looks to maintain India’s growth trajectory and instil investor confidence. The monetary policy committee of the Reserve Bank of India is likely to maintain the status quo on the key policy rate to sooth the nerves of wary investors.

As the Indian economy navigates in choppy waters, it presents a paradox of challenges and optimism. Diverse sectors are emanating encouraging signals, with notable advancements in fiscal affairs. July witnessed a remarkable upswing in GST collections, surging to Rs 1.65 lakh crore, a resounding 11% increase from the corresponding period last year.

Complementing this, a positive trend manifests in income-tax returns, spotlighted by a 16.1% rise in filings compared with the preceding year. Particularly impressive is the influx of first-time filers, totalling a record-breaking 53.7 lakh. The government’s initiatives, notably in the realms of GST and tax compliance, are evidently gaining traction.

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RBI may hold repo rate amid positive signals

Despite a worrisome global scenario, the Indian banking sector stands resilient. Evident in the financial metrics for the fiscal year 2022-23. A 9.3% surge in deposits and a 15.8% increase in advances signal a commendable achievement for the banking industry, imparting a positive ripple effect on the broader economy.

A scrutiny of key indicators reveals a promising landscape, underscoring the narrative of resilience. Notably, May 2023 witnessed a commendable 5.2% spike in industrial production across various sectors. Manufacturing and mining sectors are on an upward trajectory, substantiating the overall positive trends.

The domain of consumer non-durables exhibits commendable dynamism, while infrastructure sectors, including coal, fertilizers, cement, and steel, echo robust performance. Coal production in July 2023 rose by 14% compared with the previous year, and the April-June quarter this year substantiates a remarkable 8.6% surge in coal production—a resounding testament to infrastructure’s buoyancy.

Peering into the complex tapestry of economic indicators, inflation patterns unfurl with their nuances. For May and June, the wholesale price index dipped into negative terrain, with all commodities posting a 4.1% decline and food witnessing a 1.2% downturn. Meanwhile, the consumer price index (CPI) maintains a steady trajectory within prescribed bounds. While food inflation and general CPI hover around 4.4% and 4.8% respectively, the imminent prospect of inflation upticks, perhaps catalysed by external factors like geopolitical conflicts and supply chain disruptions, looms on the horizon.

Shifting the lens to the external sphere, the gradual moderation of India’s trade deficit is worth noting. The April-June period witnessed a substantial fall, decreasing to $22.6 billion compared with the preceding year’s $31.5 billion—a consequence of evolving global dynamics. Within this framework, the remarkable growth of electronic goods and iron ore exports, clocking in at 47.1% and approximately 35% respectively, assumes significance. Yet, cognizant of the frailty of export reliance, especially given the worldwide deceleration, prudence dictates a judicious approach.

Global paradigms remain a paradox, treading the fine line between alarm and stabilisation. Inflationary retreats in economies like the UK and the US stand juxtaposed with lingering growth concerns. Crude oil’s ascent to $80 per barrel and the surge in gold prices are manifestations of a delicate equilibrium in the face of international uncertainties. Notably, policy rate hikes of 25 basis points resonate across advanced economies, offering a compelling backdrop.

In the overarching schema, India’s role as an economic engine persists, poised to achieve a robust growth projection of 6.1% as per the IMF. The nation’s industries contribute substantially to the growth story. Consumer durables, intermediate, and capital goods sectors beckon with latent potential. In this juncture, maintaining status quo on interest rates could usher in a stabilising impetus, particularly for the manufacturing and mining sectors.

The anxiety around capital outflows and the US rate hike, juxtaposed against India’s resplendent stock market and rising investor confidence, necessitate strategic contemplation. To foster sustained economic growth, India’s financial sector policies must evolve harmoniously with interest rates attuned to stabilise growth trajectories.

Escalating interest rates could prove a damper on private investment—a prospect that warrants careful consideration. An incremental increase, albeit modest, could potentially hinder investment endeavours and project commencements, urging a prudent pivot toward future interest rate reductions.

A pause in the interest rate cycle, despite global shifts, could pave the path for a pivotal recalibration. The forthcoming cycle, slated for October 2023, could mark an opportune juncture for exploring rate reduction strategies. Thus, a concerted effort to bolster post-pandemic investments, steer growth, and invigorate employment emerges as a compelling narrative.

Proposing a proactive trajectory, the immediate blueprint beckons for a strategic groundwork to usher in lower interest rates, steering the national economy toward renewed vigour. Further, the beacon of forward guidance, resonating with a directional tilt toward interest rates, holds the potential to spur economic expansion and propel India’s growth saga.

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Dr Charan Sigh is a Delhi-based economist. He is the chief executive of EGROW Foundation, a Noida-based think tank, and former Non Executive Chairman of Punjab & Sind Bank. He has served as RBI Chair professor at the Indian Institute of Management, Bangalore.