To say that 2024 is an election year would be an understatement. It could well go down as ‘The Election Year’ of our lifetime. 

In the annals of political history, never before has such a large population voted in a single year to elect governments. Sixty four countries, plus the EU, voted this year — representing nearly 49 per cent of the global population of 8.1 billion. 

For India and the US, whose federal elections coincide every 20 years, it was a reversal of sorts. In 2004, India voted for a major change while the US saw continuum. In the 2024 elections, India preferred continuity while the US saw a major upset and change. While elections and economics may appear disparate elements, the economic policies of a nation are always a function of elected governments. The results, therefore, will be consequential for a long time to come.

This year will also be remembered for policy changes or reversals by major central banks — from the most developed to emerging nations. The US Federal Reserve has cut rates twice so far, with the promise of another cut in December. 

The Swiss National Bank was the first to cut rates — three times so far and one more likely in December. The ECB and the Bank of England also went for a chop, alongside Bank of Canada and the central banks of Sweden and New Zealand. 

This looks like an uncoordinated but concerted action, where softening inflation and the risk of slowdown or hardlanding appear to be key drivers for policy decisions. China has been far too aggressive in its fiscal stimulus, as opposed to monetary moves. Bank of Japan diverged in its policy response. 

The most noteworthy of all, however, is what India’s central bank adopted as its policy stance. India remains one of the few economies without a rate cut so far this year. 

After a prolonged pause (for the 10th consecutive time, the repo rate is unchanged at 6.5 per cent), the monetary policy committee (MPC) finally decided to move the policy stance needle to ‘neutral’ in its October sitting, which is seen primarily as a baby step towards likely easing if the war over inflation is won. 

The central bank’s analogy of an elephant lurking in the woods significantly typifies the perception that inflation is the only unwelcome thorn in the scheme of things. 

Deemed rate cut

The shift in stance to ‘neutral’, combined with a steady hangover of excess liquidity in the system, has driven overnight and short-term rates lower to the extent of being qualified as deemed rate cut. 

The average overnight Mumbai interbank offer rate (MIBOR) and the market repo overnight rate (MROR), which traded at the 6.7-6.8 per cent band between October 2023 and March 2024, is currently trading around the policy rate (6.5 per cent). This has sharply pushed down treasury bill rates. In times to come, floating rate loans could also dip. 

This will also go down as a watershed year in the debt market as India qualified to be included in several emerging market bond indices. 

The inclusion in the JP Morgan index in June was the first major achievement — this is likely to result in inflows of about $20 billion into the bond market. 

Further, the inclusion in Bloomberg’s emerging bond index, FTSE Russel EM-GBI, from next year will go a long way in ensuring sustained forex inflows and a cap on yields and cost for the issuer, besides opening up the Indian markets for the savvy overseas investor. More than the flows, it is a positive commentary on the economic stability and fiscal control of the country.

The immediate risk to our markets comes from the policy announcements of the new US President — which are expected to be expansionary and favouring targeted tariff barriers. 

Both moves can be inflationary and delay further rate cuts in major economies, as tax cuts and ultra-loose fiscal policies will lead to exploding fiscal deficits. 

Shallow rate cuts

Going by the recent statements of MPC members, the RBI’s first rate move may wait until February 2025, if not in Q1 FY26. The rate-cut cycle is also expected to be shallow as a weaker rupee would be a deterrent against aggressive monetary easing. The rupee has held itself well against the dollar in the last few weeks, even as emerging market currencies have seen sharp weakness. This, however, needs to be seen against a $20 billion drop in reserves, which must have gone towards defending a weakening rupee.

The key determinant of the rates market in India is the demand-supply factor. The borrowing calendar for the second half of FY25 is in line with budget estimates, although slightly higher than a year ago. With global rates remaining flat to lower over the medium term, Indian bond yields could trade with a softening bias. While, in the short run, US yields may have a steepening bias, which could feed into emerging market yields, the trend portends lower yields in FY26.

With most of the uncertainties associated with political and policy developments having come to a pass, the future looks less uncertain and the focus should now shift to growth-centric measures.

(The writer is Treasurer, Karnataka Bank. Views are personal)