Revival in rural demand is getting a fillip from improving farm sector activity. Investment activity continues to gain traction, on the back of ongoing expansion in non-food bank credit
FinTech BizNews Service
Mumbai, June 7, 2024: Shaktikanta Das, Governor, the Reserve Bank of India, gave a statement today following MPC meeting.
In view of the changing dynamics of international trade and in line with the progressive liberalisation of foreign exchange regulations, it is proposed by the RBI to rationalise the extant FEMA guidelines on export and import of goods and services. This will further promote ease of doing business and provide greater operational flexibility to Authorized Dealer banks. Draft guidelines will be issued shortly for stakeholder feedback.
Opportunities And Challenges
In the recent years, the world has gone through one crisis after another; and the pattern continues. Even against this backdrop, the Indian economy exhibits strong fundamentals, together with financial stability and positive growth momentum. Nevertheless, we need to remain vigilant in an unsettled global environment. The new realities brought about by technological advancements; supply chain realignments; trade and financial fragmentation; and climate change pose opportunities as well as challenges. In this milieu, India looks ready to embark upon a new era of transformation aided by a favourable demography1, improving productivity and technology, and a conducive policy environment. The confluence of these factors brightens the prospects of sustained high growth in India in the years ahead.
Assessment of Growth and Inflation
Global Growth
Global growth is sustaining its momentum in 2024 and is likely to remain resilient, supported by rebound in global trade. Inflation is easing, but the final leg of this disinflation journey may be tough. Central banks remain steadfast and data-dependent in their fight against inflation.
Domestic Growth
The provisional estimates released by the National Statistical Office (NSO) placed India’s real gross domestic product (GDP) growth at 8.2 per cent in 2023-24. During 2024-25 so far, domestic economic activity has maintained resilience. Manufacturing activity continues to gain ground on the back of strengthening domestic demand. The eight core industries posted healthy growth in April 2024. Purchasing managers’ index (PMI) in manufacturing continued to exhibit strength in May 2024 and is the highest globally. Services sector maintained buoyancy as evident from available high frequency indicators. PMI services stood strong at 60.2 in May 2024 indicating continued and robust expansion in activity.
Private consumption, the mainstay of aggregate demand, is recovering, with steady discretionary spending in urban areas. Revival in rural demand is getting a fillip from improving farm sector activity. Investment activity continues to gain traction, on the back of ongoing expansion in non-food bank credit. Merchandise exports expanded in April with improving global demand. Non-oil non-gold imports entered positive territory. Services exports and imports rebounded and posted a strong growth in April 2024.
Looking ahead, the forecast of above normal south-west monsoon by the India Meteorological Department (IMD) is expected to boost kharif production and replenish the reservoir levels. Strengthening agricultural sector activity is expected to boost rural consumption. On the other hand, sustained buoyancy in services activity should continue to support urban consumption. The healthy balance sheets of banks and corporates; government’s continued thrust on capex; high capacity utilisation; and business optimism augur well for investment activity. External demand should get a fillip from improving prospects of global trade. Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.2 per cent with Q1 at 7.3 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent. The risks are evenly balanced.
Inflation
CPI headline inflation softened further during March-April, though persisting food inflation pressures offset the gains of disinflation in core and deflation in the fuel groups. Despite some moderation, pulses and vegetables inflation remained firmly in double digits. Vegetable prices are experiencing a summer uptick following a shallow winter season correction. The deflationary trend in fuel was driven primarily by the LPG price cuts in early March. Core inflation softened for the 11th consecutive month since June 2023. Services inflation moderated to a historic low and goods inflation remained contained.
Global food prices
The exceptionally hot summer season and low reservoir levels may put stress on the summer crop of vegetables and fruits. The rabi arrivals of pulses and vegetables need to be carefully monitored. Global food prices have started inching up. Prices of industrial metals have registered double digit growth in the current calendar year so far. These trends, if sustained, could accentuate the recent uptick in input cost conditions for firms.
On the other hand, the forecast of above normal monsoon bodes well for the kharif season. Wheat procurement has surpassed last year’s level. The buffer stocks of wheat and rice are well above the norms. These developments could bring respite to food inflation pressures, particularly in cereals and pulses. The outlook on crude oil prices remains uncertain due to geo-political tensions. Assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent. The risks are evenly balanced.
What do these Inflation and Growth Conditions mean for Monetary Policy?
The developments relating to growth and inflation are unfolding as per our expectations. When the projected GDP growth of 7.2 per cent for 2024-25 materialises, it will be the fourth consecutive year with growth at or above 7 per cent. Headline CPI continues to be on a disinflationary trajectory. Monetary policy has played an important role in this process. This is evident from the decline in headline inflation by 2.3 percentage points between Q1: 2022-23 and Q4 of 2023-24. Supply side developments and government measures also contributed to this moderation of headline inflation. Repeated food price shocks, however, slowed down the overall disinflation process.
Headline Inflation In Q2, Q3
According to our projections, the second quarter of 2024-25 is likely to see some correction in headline inflation, but this is likely to be one-off on account of favourable base effects and may reverse in the third quarter. At the current juncture, the uncertainties related to the food price outlook warrant close monitoring, especially their spillover risks to headline inflation. In parallel, the behaviour of the core component also needs to be watched carefully. We need a descent of inflation to the 4 per cent target on a durable basis, while supporting growth.
There is a view that in matters of monetary policy, the Reserve Bank is guided by the principle of ‘follow the Fed’. I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions. In other words, while we do consider the impact of monetary policy in advanced economies on Indian markets, our actions are primarily determined by domestic growth-inflation conditions and the outlook.
Liquidity and Financial Market Conditions
During the current financial year so far, system liquidity transited from surplus to deficit conditions, and back to surplus in early June. In consonance with the commitment made in the April policy statement of remaining nimble and flexible in liquidity management and in view of the shifting liquidity dynamics, the Reserve Bank mopped up surplus liquidity through variable rate reverse repo (VRRR) auctions during the first half of April, while injecting liquidity through variable rate repo (VRR) operations in the later part of April and in May. In the first week of June, VRRR auctions have been conducted. Banks’ recourse to the marginal standing facility (MSF) under the liquidity adjustment facility (LAF) remained low during 2024-25 so far.
Mirroring the liquidity dynamics, the weighted average call rate (WACR), on an average, remained close to the middle of the corridor. Across the term money market segment, the yields on certificates of deposit (CDs), commercial papers (CPs) issued by non-banking financial companies (NBFCs) and 3-month treasury bills (T-bills) also eased. In the credit market, monetary transmission remains ongoing.
As you would be aware, the Central Board of the Reserve Bank decided to transfer Rs2.11 lakh crore as surplus to the Central Government for the accounting year 2023-24. As the economy remains robust and resilient, the Board decided to utilise this opportunity to increase the risk provisioning under the contingent reserve buffer (CRB) to 6.5 per cent of the Reserve Bank’s balance sheet for 2023-24 from 6.0 per cent in 2022-23. This would further strengthen the Reserve Bank’s balance sheet. Prudence is at the core of our standard operating procedure.
The Indian rupee (INR) moved in a narrow range with low volatility during 2024-25 so far (up to June 5), despite trading under pressure amidst foreign portfolio investment (FPI) outflows. The relative stability of the INR bears testimony to India’s sound and resilient economic fundamentals, macroeconomic and financial stability, and improvement in the external outlook.
Looking ahead, the Reserve Bank will continue to be nimble and flexible in its liquidity management through main and fine-tuning operations in both repo and reverse repo. We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner which preserves financial stability. As our actions over the recent period have shown, the Reserve Bank stands committed to maintain stability and orderliness in all segments of financial markets and institutions regulated by it.
Financial Stability
The annual financial results for 2023-24 indicate that the banking system remained sound and resilient, backed by improvement in asset quality, enhanced provisioning for bad loans, sustained capital adequacy and rise in profitability. The non-banking financial companies (NBFCs) also displayed strong financials in line with the banking sector. Notably, the gross non-performing assets (GNPAs) of scheduled commercial banks (SCBs) and NBFCs are below 3 per cent of total advances as at end of March 2024. It is important that the Regulated Entities (REs) should continue to improve their governance standards, risk management practices and compliance culture across the organisation.
External Sector
With lower trade deficit, robust services export growth and strong remittances, the current account deficit is expected to have moderated in Q4:2023-24. Services exports were predominantly driven by software exports, other business services and travel exports. The phenomenal rise of global capability centres (GCC) in India has provided a significant boost to India’s software and business services exports. India – with an expected 15.2 per cent share in world remittances in 2024 – continues to be the largest recipient of remittances globally. Overall, the current account deficit for 2024-25 is expected to remain well within its sustainable level.
FPI, ECBs
On the external financing side, foreign portfolio investment (FPI) flows surged in 2023-24 with net FPI inflows at US$ 41.6 billion. Since the beginning of 2024-25, however, foreign portfolio investors have turned net sellers in the domestic market with net outflows of US$ 5.0 billion (till June 5). In 2023, India retained its position as the most attractive destination for greenfield foreign direct investment (FDI) in Asia Pacific. Gross FDI remained robust in 2023-24, but net FDI moderated. External commercial borrowings (ECBs) and non-resident deposits recorded higher net inflows as compared with the previous year. The amount of ECB agreements also grew markedly during the year.
Touching a new milestone, India’s foreign exchange reserves reached a historical high of US$ 651.5 billion as on May 31, 2024. India’s external sector remains resilient and the key external vulnerability indicators continue to improve. Overall, we remain confident of meeting our external financing requirements comfortably.
