By Soumya Kanti Ghosh, Member, 16th Finance Commission, and group chief economic adviser, State Bank of India
Amid a host of ever-rising and incrementally perplexing challenges besieging the global economy that have melted broader markets, plummeted cross-border trades, and dissipated mutual trust among jurisdictions even as capital and investments look destined to undergo structural changes in the short to medium term, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has shown prudent wisdom in walking the medium path.
Plans to reinvigorate growth by reinforcing key drivers aligning policy rates with market expectations are perhaps no silver bullets, especially considering the fractured trade and commerce environment as pass-through of imported or exogenous shocks increasingly gains currency.
A major confidence booster for the MPC has been the fairly benign inflation trajectory, as visibility on lower food inflation gets further transparency, weakening crude prices (likely to stay low as OPEC raises output), and a glut in commodity markets supplementing the deceleration envisaged in cost pushes inflationary concerns down the road.
Comfortable water reservoir levels (around 40% now against a decadal average of 34%), with better crop yield expectations strengthen the optimism. A little bit of caution in consolidating the early warning signals on climate through big data analytics should go a long way in fortifying the key components of supply chains as we brace for a hotter, disruptive summer.According to RBI forecast, headline inflation for FY26 should hover around 4.0%.
We had incidentally factored in lower inflation beforehand, and understand that in the first two quarters the numbers may be a tad lower. In fact, threats of dumping amid global trade disruptions could push inflation further lower. The headline inflation rate is likely to stay closer to or lower than 4% for at least the first half of the current fiscal.
The MPC has estimated growth in real GDP at 6.5% in FY25 (based on second advanced estimates of the National Statistics Office), with private final consumption expenditure and gross fixed capital formation posting healthy growth of 7.6% and 6.1% respectively even as government consumption expenditure increased by 3.8% over the last year.
For the current fiscal, the RBI has projected GDP growth at 6.5%, a downward revision of 20 basis points from the earlier prognosis. The looming global uncertainties could have a further dampening impact on domestic growth this fiscal.
Separately, unambiguous communication on change of stance to accommodative (sans major shocks), and decoupling it with prevailing liquidity conditions is a confidence-boosting measure. It highlights independent application of mind by a central bank revered for its forbearance.
While durable liquidity is expected to remain in surplus mode (transfer of profits by the RBI itself, open market operations, balance-of-payments surplus, and other injections), an uptick in credit and/or drying up of household deposit accrual by banks can require a return to the drawing board. Further, work on the adoption of secured overnight rupee rate as a true operating target of liquidity operations under the liquidity management framework is imminent. Structural barriers that nudge many banks to park surplus funds in standing deposit facility overnight warrant corrective measures too.
In a large part, despite global uncertainties, traction in domestic investment is envisaged as capacity utilisation is expected to hold the fort with demand firming up (partly amplified by budgetary measures on tax). The Centre’s sustained drive in infra spending (with a multiplier effect envisioned as states are prodded to imbibe a competitive mindset with the add-on capex for them in the form of interest-free capital loans) will also act as an enabler.
Incidentally, services exports outside the purview of tariff embargoes (as US-based MNCs are the largest beneficiaries) should bridge the likely shortfall in merchandise exports even as elasticity for India (US makes up ~18% of overall exports and ~3% of GDP) appears comfortable given a widening base of partner nations/bloc and change in composition of the basket.
Transmission of cuts in deposit rates may take a little longer due to sticky current account and savings account deposits, whereas it is more democratised on the credit front. It may be noted that deposit mobilisation of banks is influenced by a myriad of external factors.T
The 2024 UNCTAD report flagged concerns on the changing contours of foreign direct investment (FDI) flows across geographies. Given the lower net FDIs even when the gross FDI rose by 15.3% (April 2024-January 2025), enhancing ease of business through focussed reforms appears a sine qua non to augment manufacturing. Streamlining greenfield ventures, international project finance, and sustainable development goals can be the vectors of whetting MNCs’ appetite. Foreign institutional investor flows should resume as previously stretched valuations revert and offer an innate advantage to the India story that begets value, especially for the likes of sovereign wealth funds and pension/insurance funds that are hunting for long-term value propositions to reward investors.
In other measures, the RBI’s proposal to allow co-lending for all regulated entities (REs) and all loans should help in building a resilient credit ecosystem where best practices are proliferated across tiers and credit growth accentuates.Enabling securitisation of stressed assets through market-based mechanisms should deepen markets for such assets. Given that securitisation volumes have soared 80% year-on-year as of December 2024 as per rating agencies, the current move to create a new market-based framework could give more flexibility to managing assets.
Harmonisation of gold loans across consumption as also income generating activities can boost agri/allied activities the most (as loan sizes swell with gold prices) with prudent moats of risk containment. Taking a holistic view on non-fund-based facilities, REs should broaden the funding sources chiefly for infrastructure financing (especially as insurance funds are jostling for space).
The gold loan portfolio of banks jumped by 71.3% year-on-year till December 2024 to `1.72 trillion. The review of guidelines in line with the evolving market situation when gold prices have declined sharply is also well thought out.
Proposed P2M (person-to-merchant) reforms by the National Payments Corporation of India stem from a risk angle as payments on push (initiated by customers) rather than pull (initiated by merchants). It is a counter-intuitive measure to reduce frauds, whereas making regulatory sandbox “on tap” and a neutral theme can enrich doable ideas on the reg-fintech front.It seems the proverbial Sanjay has a vision that can transcend the fuzzy boundaries of imminent times.
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