The latest bi-monthly meeting of the Reserve Bank of India’s Monetary Policy Committee (MPC), whose outcomes will be revealed by RBI Governor Shaktikanta Das on February 8, is widely expected to result in a status quo on interest rates yet again. At its last review in early December, five of the six MPC members had voted to persist with the ‘withdrawal of accommodation’ stance and the panel had raised its GDP growth forecast for the year to 7% from 6.5%. Hopes of a stance shift to ‘neutral’ are slim, but it would be instructive to see if the growth estimate is revisited in light of the National Statistical Office projection of a 7.3% uptick in 2023-24. The U.S. Federal Reserve held interest rates for the fourth straight review last week, and chairman Jerome Powell was vague about the proximity of much-anticipated rate cuts this year, seeking more data to establish that inflation had been reined in sustainably. India’s policymakers may not take a direct cue from the U.S. Fed, but the concerns are similar as Governor Das had articulated in December. The 4% inflation target remains elusive for now — December’s inflation rate hit a four-month high of 5.7%. The RBI expects inflation to average 5.2% in this quarter, which it only expects it to cool to 4% in the July-September phase, providing a window for a rate cut consideration if the monsoon is normal.
Finance Minister Nirmala Sitharaman’s interim Budget for 2024-25, however, could give the central bank some more room to ease liquidity constraints in the economy. While the government did not provide a prop for weak consumption trends, it is also not adding to inflation pressures. A stronger than expected pursuit of fiscal consolidation in this year and the next, and a promise to lower gross market borrowings from ₹15.4 lakh crore this year to a tad over ₹14 lakh crore in 2024-25, should help. The Minister asserted that this will free up more credit for the private sector now that industry is beginning to invest ‘at scale’. Gross market borrowings as a share of the fiscal deficit will also drop below 84% from 89% this year. With foreign capital inflows into Indian government bonds likely to spike following their inclusion in global bond indices, banks which are the major holders of these securities and are facing elevated credit to deposit ratio growth rates, should get more space to lend. Economists expect this to help lower borrowing costs for the entire economy. Yields on government bonds have already dropped from 7.14% ahead of the Budget to about 7.05% and could drop further, even as systemic liquidity has improved a tad. For Mint Street hawks, that is no small comfort.