Recording of the Event

Key Takeways

1. Real rates are high and could negatively impact investment and growth
2. Probability of decoupling from the US interest rate cycle is low
3. Indian economy is recording high growth rates
4. Fiscal consolidation reflects strengthening of Indian Economy
5. There is need to infuse liquidity in the economy and that could happen by influencing reserve money directly
6. US Fed Reserve may not lower the policy rates in 2024. However, the Fed Reserve is gradually moving towards rate-easing cycle
7. There is need to change the stance to neutral

Recommendations of EGROW Shadow MPC

Members of EGROW — 6
Repo Rate
Pause – 3
Decrease – 3

Guests — 4
Repo Rate
Pause – 4
Decrease – 0

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Surjit Bhalla, Former Executive Director- India International Monetary Fund

My view is that the RBI may be lulled by rapid GDP growth into making the same mistake it made in 2019. However, a redeeming feature is that, for the first time, the Monetary Policy Committee (MPC) has two dissenters—a historical first! It’s recommended that interest rates should be lowered.

2. Shri Indranil Sen Gupta, Head of India Research, CLSA

We expect the RBI MPC to maintain its current stance but consider a rate cut in October if the Fed Reserve signals a cut by then. There are solid reasons for the RBI to lower rates:

• Real Gross Value Added (GVA) growth is slowing.
• Inflation is well within the 2-6 percent range, with core inflation even lower.
• As a result, the real repo rate is rising significantly above its long-term neutral level of 1percent.
• Additionally, the Finance Minister has introduced a program of fiscal consolidation.

That said, the RBI has made it clear that it does not want to take any chances with the Fed’s actions.

3. Statement by Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

The global tide is shifting, with the Fed Reserve gradually moving towards a rate-easing cycle. However, domestically, food inflation risks remain a concern, which will likely prompt most MPC members to adopt a cautious approach in the near term. I expect the RBI to maintain its current rates and stance in the upcoming policy meeting. Nevertheless, the RBI has been demonstrating some flexibility in maintaining ample liquidity, allowing overnight rates to stay in the 6.35-6.50 percent range. This flexibility could pave the way for a potential shift in stance during the October policy meeting, with a possible rate cut in December. Much will, however, depend on the global environment and the evolution of risks to domestic inflation in the second half of FY25 and beyond.

4. Shri Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank

With core inflation moderating, monsoons catching up and moving towards normal reflected in satisfactory sowing performance of most major crops, the RBI should pivot towards easing. The first step would be to change its stance to neutral. The prevalence of surplus liquidity suggests de-facto that withdrawal of accommodation is ending and explicit acknowledgement is desirable. The endeavour to battle volatile food inflation through monetary tools could mean that the RBI overcompensates for a supply side problem and sacrifices growth. Globally, major central banks with the exception of China and Japan have cut rates. There is a high probability that the Fed Reserve will cut rates in September.

Given these factors, I advocate for a change in stance to neutral and a 25 basis point rate cut in the next policy meeting.

5. Shri Siddhartha Sanyal, Chief Economist & Head- Research, Bandhan Bank

In terms of rates, no movement is expected in the upcoming policy meeting. A rate cut by the RBI is anticipated in the early next calendar year. While inflation remains benign, with headline inflation having edged up slightly and core inflation remaining low, it may rise a bit in the coming months. Inflationary pressure from the budget is minimal, and the Fed Reserve might cut rates in September, which could influence the RBI's liquidity policies.

Growth in reserve money over the past two and a half years has been relatively weak, around 6-8 percent, suggesting room for the RBI to increase liquidity. Historically, reserve money growth averaged around 5 percent between financial year 2012 and financial year 2013. During that period, India was part of the Fragile Five economies, facing challenges like the taper tantrum (May 2013). CPI inflation was 8.5 percent, the Current Account Deficit was approaching 5 percent, and the fiscal deficit was much higher compared to today, where fiscal parameters are healthier and flows are decent.

Given these factors, the overall monetary policy stance is should become neutral. It is recommended that RBI should provide a larger quantum of liquidity to the market, leading to an increase in reserve money growth.

6. Dr. Charan Singh, CEO and Director, EGROW Foundation

The Indian economy is performing better than expected. The recently released Economic Survey clearly has analysed in depth various aspects of the economy and clearly articulated that the growth in important sectors of the economy continued to be robust: agriculture, manufacturing, and construction also show prospect of good growth in the year ahead. The current account is under control with adverse trade balance corrected by robust invisibles. In the financial sector, growth in credit is on the trend but deposits are declining, getting diverted to mutual funds and physical assets.

The fiscal policy is continuing on the consolidation path with gross fiscal deficit budgeted at 4.9 percent in the final budget for 2024-25 as compared with 5.1 percent in the interim budget and 5.8 percent in the revised estimates for 2023-24. The revenue deficit has also shown a similar declining trend. Tax collection, given the trend in the economic growth, is high. Corporation tax is budgeted to increase to Rs. 10.2 trillion as compared with provisional actual of Rs. 9.1 trillion while Goods and Services tax is budgeted to increase to Rs. 10.6 trillion from Rs. 9.6 trillion. Similarly, income tax is budgeted at Rs. 11.9 trillion, higher than Rs. 10.4 trillion in the provisional actuals. Dividend and profits are projected to increase to Rs. 2.9 trillion from Rs. 1.7 trillion. Capital expenditure is budgeted at Rs. 11.1 trillion from Rs. 9.5 trillion. The effective capital expenditure in 2024-25 is budgeted at 4.6 percent of GDP compared to 4.2 percent in the previous year. The important thing in the budget is the significant lowering of borrowings from the market which should result in lower pressure on the interest rates: Market borrowings are budgeted at Rs 11.6 trillion in 2024-25 as compared with budget estimate of Rs. 11.8 trillion in 2023-24. The overall budget is 14.8 percent of GDP.

Inflation is within range of inflation target, though in recent weeks, some prices of vegetables are tightening. The exchange rate continues to be stable and has suffered least depreciation when compared with other major economies against the US Dollar. The foreign exchange reserves at USD 667.4 billion on July 26, 2024 continues to scale new heights.

The Bank of England (BoE) has cut its interest rates for the first time since the onset of COVID by 25bp to 5.0 percent. European Central Bank (ECB) had earlier reduced its interest rates in June by 25bp. The Fed Reserve chairman, Jerome Powell, argued on July 31 that the Fed Reserve is not lowering its interest rates as inflation data is still not within the comfort zone while the unemployment data is as was expected. He further elaborated that in the forthcoming September meeting, the Fed Reserve may consider a cut but that would depend on many factors. My understanding is that Fed Reserve will not reduce its policy rates until the election is over in the US. This implies that the Fed Reserve cut will spill over in January 2025 at the earliest. The key issue now for consideration is whether the RBI will decouple its interest rate policy from the Fed Reserve. Though India is the fastest growing economy in the world and continues to do so with the growth rate of 7 percent, the actual potential is much higher in the range of 9-10 percent. The young demographic India has to grow at the fastest rate to ensure development and employability for its teeming millions. The lowering of the policy rate b y the RBI will boost investment and growth. While the government is infusing capital expenditure, the private sector will continue to wait till interest rates are lowered, to invest. Similarly households could be waiting for lower interest rates to make major purchases of capital goods and invest in new houses. Thus, the high interest rates could be stifling growth stimulus. As the BoE and ECB have initiated rate cuts without waiting for the US Fed Reserve to reverse the cycle, India can also follow an independent monetary policy course.

Therefore I recommend a cut of 25 bp, considering the domestic economic situation, and having completed the critical election cycle.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

1. Shri Subhas C. Aggarwal, Chairman and Managing Director, SMC Group.

RBI will not reduce rate before September. The rate may not change in this bi- monthly meeting.

2. Sh. Arjun G Nagarajan, Chief Economist, Sundaram Mutual

There is strong conviction that the Fed Reserve will begin cutting rates in September. However, it is unlikely that the Fed Reserve will make significant cuts immediately. More likely, any substantial rate reductions will occur in December or next year.

The RBI is expected to maintain a hawkish stance, as core inflation remains low while headline inflation is holding steady. There is a moderate probability that the RBI may cut rates in the budget for 2025.

3. Shri Madhav Nair, Co-Chairman ASSOCHAM, National Council for Banking and CEO- India, Bank of Bahrain and Kuwait

India’s economic growth continues to be strong and considering that the inflation is still high (though within the range) hence in my view RBI would continue to hold rates in 2024 to rein in inflation. At most, a rate cut might occur in early 2025.

4. Shri Sujit Kumar, Chief Economist, NABFID

GDP growth surprised positively last fiscal year with an 8%+ increase. However, underlying momentum appears to be weakening, as indicated by high-frequency indicators for FY25 so far.

• Inflation ticked up in June 2024, driven by food items, particularly a seasonal spike in vegetable prices. Core inflation remains weak, well below 4%, and overall retail inflation is expected to stay below 5% for FY25.
• On the fiscal side, the Budget signalled a continuation of fiscal consolidation, which reduces the incremental fiscal impulse to prices.
• Government capital expenditure (capex) remains structurally positive for growth and price stability. Private capex is also recovering but needs to strengthen further to support demand.
• Consumption, especially in rural areas, could improve with the monsoon progressing towards normal and expectations of a better harvest.
• System liquidity is comfortable, although banks' Credit-Deposit (CD) ratio may remain elevated for some time. Foreign exchange (forex) inflows will contribute to system liquidity.
• The external sector is in a favorable position with a lower current account deficit (CAD) and stronger forex reserves. This further supports the Indian central bank’s potential decoupling from the policy priorities of advanced economies.
• On balance, there is room for the MPC to adopt a “neutral” policy stance in the August 2024 review while keeping rates steady. The MPC may then consider easing rates in the second half of FY25.