The views of the street are unanimous that the RBI is expected to keep the interest rates steady in the upcoming monetary policy review on June 7. With the increasing resilience of the economy evident from the high-frequency indicators, there is no immediate systemic compulsion for the RBI to cut rates. Inflation is forging towards the midpoint target of 4 per cent; currently at 4.83 per cent in April, down from 5.10 per cent in January, though the upside risks to inflation persist.
The forecast of a normal monsoon and positive indications in the farm sector bode well for food production and could alleviate price pressure on food items.
The RBI maintained the average inflation forecast for FY25 at 4.5 per cent, with Q1 at 4.9 per cent, Q2 at 3.8 per cent, Q3 at 4 per cent and Q4 at 4.5 per cent. In balancing growth and inflation, the RBI draws comfort from GDP trends. The RBI is likely to remain circumspect with respect to rate management.
External sector risks
The West Asia crisis and other hostilities continue to exacerbate geopolitical risks. Uncertainty about the global supply chain and the stability of crude prices could push up inflation. Global interest rates continue to remain elevated. The US Federal Reserve left the key benchmark interest rates unchanged maintaining them at a 23-year high since July 2023 at 5.25-5.50 per cent for the sixth straight time. It further indicated holding rates high until inflation cools and moves consistently to the target range.
Inflation in the UK is at 2.3 per cent in April down from 3.2 per cent in March, opening up scope for the Bank of England to cut rates when inflation hits the 2 per cent mark.
In the Euro Zone, the headline inflation is steady at 2.4 per cent in April. Its growth rebounded to 0.3 per cent. ECB is expected to spearhead a rate cut in June. Other central banks may follow in September if inflation softens.
Due to sluggish resource accretion, India’s systemic liquidity deficit has persisted, posing risks to banks. For example, in May 2024, the RBI conducted 9 VRR auctions to pump ₹7.75 trillion. The overwhelming demand from banks increased bids to ₹11.4 trillion. The cut-off interest rate was 6.61-6.64 per cent, staying well above the repo rate but below the MSF rate.
Despite elevated interest rates during the last 18 months, bank credit growth was at 16 per cent during FY24. According to Crisil Ratings, the credit growth may recede to 14 per cent during FY25 with a bias towards corporate credit as banks realign their strategies. The RBI has hinted at increasing risk in unsecured consumer credit and pinpointed several inadequacies in the credit administration of gold loans.
Way forward
Transparent policy helps market participants read the pulse of the RBI. It ensures stability in the financial markets and mitigates market risks. The regulatory measures in the policy could point to tackling climate risks, which are now becoming even more intense. The RBI may direct banks to accelerate the mobilisation of green deposits with product innovation for increasing green lending. Export credit may also become part of priority sector lending to boost exports, the much-awaited reform. Once the major central banks cut rates, the RBI may join them in August or October.
The writer is an Adjunct Professor at the Institute of Insurance and Risk Management, Hyderabad. Views are personal