Monetary Policy | Shall we pause for a moment?

The RBI is likely to wait and watch for the timeliness and intensity of the upcoming monsoon, and assess the actual impact of the transmission of the previous rate hikes

All eyes will be on the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) as it convenes today (June 6) to weigh all the positive signs and the risks on the horizon for the economy. Will there be a rate hike? Or will it reduce the repo rate? Or will it pause it, as was done in April?

With Q4 growth in FY23 coming at 6.1 per cent, and the economic momentum continuing to sustain at the start of FY24, there is reasonable buzz and confidence around the 6.5 per cent growth estimate for FY24 that the Finance Minister sounded out during the Budget Session in February. Of course, quite a few factors together are leading to this confidence.

Retail inflation has slowed sharply and fallen to an 18-month low of 4.7 percent in April (well below the RBI’s tolerance limit for the second consecutive month and also well within their projection of 5.2 percent for FY24). So also, the Wholesale Price Index print for April at -0.92 percent is at a 34-month low.

Macro fundamentals look good, with GST collections rising 11.5 per cent in May to cross Rs 1.5 lakh-crore, sustaining the momentum seen over the last few months. In fact, GST collections have consistently been over the Rs 1.4 lakh-crore level for the last 15 months — clearly a strong barometer pointing towards heathy economic activity and better compliances amid tighter scrutiny. This is also reflected in the May purchasing managers’ index (PMI), which rose to a 31-month high of 58.7. In fact, coming out of a heathy Q4 growth of 4.5 percent in the sector, manufacturing activity continues to remain robust, in part due to improving supply chain conditions. So also, the upsurge paves the way for stronger increases in production and employment.

With capacity utilisation nearing/crossing 75 per cent levels in many sectors, one can expect the corporate sector to positively work towards capacity building, backed by healthy balance sheets, and sufficient thrust on capex in the fiscal policy of the government, including huge support towards Make in India through the PLI schemes in multiple sectors. Of course, the large government spend outlined for capex will also aid the overall process through the multiplier effect it brings, along with the banks’ eagerness to support credit growth across all segments.

Similarly, with weakening of commodity prices, strong services export, and rising remittances from abroad, there is a good possibility of our current account balance (CAB) showing a surplus in Q4. More importantly, this is happening after a gap of six quarters. With services export continuing to look robust, this surplus could well continue into this quarter as well, lending credence to a sound external account.

With peak sales of tractors in the last financial year, there is also news about some momentum in the rural markets over the last few months. Considering assembly elections in multiple states this year and general elections in 2024, and a strong push towards infrastructure spending by the government, one can expect the cash flow to remain in the rural economy.

Lately, unseasonal rainfall as well as the heatwaves in different parts of India has played spoilsport, impacting crop yields in multiple states and also impacting consumer demand for summer-related products. Similarly, El Nino and its adverse impact on rainfall remain potential threats to macro-economic stability and food prices. So also, protracted geopolitical tensions, moderating global growth, and financial sector volatility in the overseas markets (which has already caused a funding winter in the startup space) — pose downside risks that need to be watched closely.

In the balance one would anticipate a high likelihood of a pause from the MPC on June 8. So also, one would assume that the RBI would prefer to wait and watch for the timeliness and intensity of the upcoming monsoon, and assess the actual impact of the transmission of the previous rate hikes on the broader economy before it looks to take any decisive action towards an additional hike.

(Manish Kothari is President and Head – Commercial Banking, Kotak Mahindra Bank.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.