With the upcoming monetary policy on August 8, expectations are rife that the repo rate will remain unchanged at 6.5 per cent as CPI inflation is still away from the 4 per cent mark.

Beginning on May 4, 2022, RBI has been fighting inflation. The repo rate was hiked from 4 per cent to 6.5 per cent with its last hike in February 2023. The stance of the policy too has been kept accommodative.

As a result, the CPI inflation was brought down from its 8-year high of 7.79 per cent in April 2022 to 5.08 per cent by June 2024.

Food inflation lingered around 8 per cent since November 2023 to pose formidable upside risks. The WPI is at 3.36 in June 2024, up from -4.18 per cent in June 2023. The hike is due to the rise in prices of food articles, manufactured food products, crude petroleum and natural gas, mineral oils, other manufacturing, etc.

Given that the average CPI inflation is expected to remain at 4.5 per cent in FY25 and the economy is well poised to grow at 6.5-7 per cent in real terms in FY25, the chances of a rate cut during CY 2024 are remote, as there seems no urgency for RBI to soften rates.

Global headwinds

The global interest rate sentiments are turning buoyant, with the US Federal Reserve while keeping rates intact indicating a possible beginning of a string of rate cuts from September. The US inflation dropped from 3.3 per cent in May to 3 per cent in June 2024 against its target of 2 per cent.

ECB already started a rate cut in June 2024 and its inflation in June was down to 2.5 per cent. Bank of England reduced the bank rate by 25 basis points when its inflation fell to 2 per cent.

Given this backdrop, the interest rate trajectory in India is set to be unchanged till at least October 2024 even though in the last monetary policy review in June 2024, two external MPC members voted for a rate cut and may view it in the same way now. By October, there could be more clarity about external sector risks, their implications on the domestic financial sector, and the status of CPI inflation.

The regulatory measures may reflect the impact of some of the banking-related new budgetary changes and ways to deal with the emerging risks in the financial sector. The digital payment index (DPI) grew to 445.50 in March 2024 increasing from a base of 100 in 2018. The financial inclusion (FI) index reached 64.2 in March 2024 starting at 43.4 in March 2017. Both benchmarks signify the increasing banking and digital penetration.

Foreseeing the elevated liquidity risks due to increasing vulnerability to bank deposit stability, RBI has already issued draft guidance to assign an additional 5 per cent run-off factor for retail deposits, 10 per cent for stable retail deposits, and 15 per cent for less stable deposits which are enabled with internet and mobile banking facility.

Risk norms

Changes in norms could be reflected in the introduction of the revised credit risk assessment of MSME entrepreneurs based on digital footprints, onboarding of smaller companies with turnover of ₹250 crore on the TReDS platform for faster cash flows to MSMEs, thrust on Mudra loan expansion to Tarun Category of good borrowers and expansion of educational loans eligible for interest rate subvention, etc.

As on June 28, bank deposits had grown 11.1 per cent year-on-year, lagging credit growth of 14 per cent. Care Ratings observed that since January 2024, credit growth has been slower than deposit growth by Rs. 3.5 trillion. Incremental credit growth was ₹8.4 lakh crore while deposits grew by ₹11.9 lakh crore. But there are indications that banks’ efforts to woo depositors are working.

The RBI could propose certain sturdy regulatory measures to enforce better risk management and systemic controls. As the interest rate pathway is already known, the regulatory perspectives will find significance in the upcoming monetary policy.

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

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