RBI Governor Shaktikanta Das’ 32nd monetary policy, presented on Friday is open to many interpretations. The key takeaway here is that of cautious optimism.

Considering the tone of the four previous monetary policy committee (MPC) deliberations so far in FY24, the MPC commentary on Friday stands out differently.

Governor Shaktikanta Das’ underlying optimism on the economy and its inherent strengths remained unchanged or may be a few shades stronger than before. Yet, caution, owing to unpredictable external factors and inflation staying stubbornly over four per cent, was equally taking his mind space. “The near-term outlook, however, is masked by risks to food inflation which might lead to an inflation uptick in November and December. This needs to be watched for second round effects, if any,” he said in his speech, while explaining why the MPC will remain focused on withdrawal of accommodation stance.

Rate cut some time away

Consequently, there are two interesting takeaways.

The growing popular notion that the RBI may start thinking of reducing rates from early FY25 seems unlikely soon. At least going by what was said on Friday, rate cuts seem to be off the anvil for another five MPC session; that’s till about mid-2024. The current policy repo rate of 6.5 per cent may prevail for a while.

Secondly, while liquidity is at a comfortable spot today, Das isn’t ruling out measures including open market operations to keep money supply in check. Clearly, both these inferences suggest that the perfect good days that markets, bankers and corporates have been waiting for is still some time away.

In fact, the expectation among equity market participants was that Das would deliver an early Christmas gift for them in the form of a faster guidance for rate reversal cycle; the CNX Nifty was anticipated to close at 21,000 mark if the projections were in that direction.

That not quite being the case for the stock market, the fifth MPC for FY24 was more like business as usual or slightly pessimistic.

Healthy India Inc

But here’s the good news: the downside risk to repo rates staying elevated at 6.5 per cent may not work to the disadvantage of India Inc. According to rating agency ICRA’s estimates, interest coverage ratio of Indian companies that it tracks was around 4.5 – 5x in December quarter of FY24 as against 4.5x in September FY24 quarter. The marginal improvement augers well for businesses as it indicates that revenues they earn very adequately cover for the interest cost expended by them during the given period. With corporate health at a comfortable position, demand exhibiting buoyancy, including a noteworthy pick up in rural demand, the economy seems to be well positioned to sustain a prolonged phase of higher repo rate.

From here on the fight is really with the unknowns. Elevated debt levels, lingering geopolitical hostilities and extreme weather conditions aggravate the risks to global growth, the Governor said in his speech. There is also an inflation outlook which is a big domestic unknown. Ideally, with risk weights increasing for unsecured loans, demand should taper as this channel of borrowing may become tad expensive. However, this may take six months or so to play out and if it does, it could have a positive rub-off on inflation. But with general elections round the corner, will ‘back of the envelop’ economics work?