The Reserve Bank of India had hinted at the likely upside surprise in GDP growth data. Accordingly, breaching all estimates, GDP clocked 7.6 per cent in Q2 FY24, against the RBI estimate of 6.5 per cent. The GVA is at 7.4 per cent. The backdrop of 7.8 per cent GDP growth posted in Q1 affirms the likelihood of growth breaching the targeted level of 6.5 per cent set for FY24. Global think tanks are unanimous that India continues to remain the fastest-growing major economy. The CPI inflation at 4.87 per cent in October is well on its way to eventually hit the 4 per cent mark. The WPI continues to be in negative territory for the seventh consecutive month in October.

Further, the RBI has been consistently working to align system liquidity to ensure financial stability, ensure growth, and tame inflation. The liquidity overhang was absorbed and a standing deposit facility (SDF) was introduced in April 2022. Variable Rate Reverse Repo (VRRR) auctions and Variable Rate Repo (VRR) tools were judiciously used to balance liquidity. The impact of excess liquidity arising from the withdrawal of currency of ₹2,000 was neutralised by introducing an I-CRR of 10 per cent temporarily, that is now withdrawn.

The liquidity deficit — the amount of funds banks need to borrow from the interbank market or the central bank — stood at ₹1.74-lakh crore on November 28, with weighted average call rates (WACR) hovering beyond repo rates and sometimes even breaching the MSF rate of 6.75 per cent. Thus, the stance of the monetary policy to remain focused on the withdrawal of accommodation was scrupulously implemented.

Global headwinds

The recent statements of the US Federal Reserve reinstated its commitment to stay focused on chasing its inflation target of 2 per cent (3.2 per cent in October) by keeping rates at present levels. The annual inflation of the UK sharply dropped to 4.6 per cent in October, down from 6.7 per cent in September. Similarly, the Euro Zone inflation slipped more than expected to 2.4 per cent in November. The growing consensus that the rate hikes reached a peak sent positive headwinds to global stock markets. However, the global interest rates will ostensibly stay elevated until inflation is brought within target.

Recent OPEC+ deliberations to cut oil output may not significantly hike crude prices which have come down to $82.50 per barrel on November 28, down from $94.30 in September. It is quite possible that the Israel-Hamas conflict may not escalate further to exacerbate the geopolitical risks. Despite an added dose of sanctions against Russia, its armed conflict with Ukraine may not get resolved too soon but its collateral damage may not increase risks to Indian growth trajectory.

Challenges ahead

Though the domestic economy is on a stronger footing and global headwinds are not too threatening as to upset inflation-growth dynamics, the lingering El Nino impact on the farm sector could be a cause of concern. The continued elevated lending rates and moderated credit growth at 15.3 per cent in October as against 18.3 per cent in the previous year may impact the growth in the medium term. Of this, flow of bank credit continues to be sluggish at 5.4 per cent which may disrupt the revival of the manufacturing sector that had shown a resurgence in Q2.

The economy growing even at 6.5 per cent during FY24 is set to breach the 10-year average of 5.9 per cent growth. Inflation is well under control with the inflation targeting framework, amid moderate global headwinds. The situation warrants a status quo in interest rate in the monetary policy review in December while a cut in interest rates will have to wait till the inflation remains at 4 per cent on a durable basis.

Of course, the fine-print in the regulatory dispensation of the RBI can always surprise the market players. But the writing on the wall about monetary policy action is discernible.

The writer is an Adjunct Professor at the Institute of Insurance and Risk Management, Hyderabad. Views are personal

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