RBI continues hawkish hold stance and may not cut in FY25

·         India’s headline/total CPI may not fall below 4.5% in FY25 on a durable basis and the Fed may not cut even in Dec’24

On 5th April, as unanimously expected, India’s Central Bank RBI held its benchmark policy repo at 6.5% for the 7th consecutive meeting (5-1 votes) without signaling any rate cut/pivot/shifting of stance from restrictive to neutral to ensure sticky/elevated inflation (CPI) eased back towards 4% targets while supporting GDP/economic growth. The market was expecting some dovish stance from RBI this time such as the official declaration of the end of the tightening cycle/removal of accommodation stance to a so-called neutral stance and subsequent logical step of rate cuts amid cooling core inflation around 3.75% (6M rolling average) and below 4.0% targets for the last few months. But RBI/Governor Das sounded more hawkish than expected and Nifty, USDINR came under stress to some extent (soon after RBI) on a hawkish hold stance (negative for equities and positive for local currency).

On 5th April’24, as unanimously expected, RBI held all its key policy rates amid still elevated total CPI (inflation). RBI kept the benchmark policy repo rate at +6.50%, effective reverse repo rate (SDF) at +6.25%, MSF (Marginal Standing Facility), and Bank rate at +6.75%.

RBI REPO/LENDING RATE

On 5th April, RBI projected India’s real GDP growth for FY25 at +7.0%, with estimates of 7.1% for Q1; 6.9% for Q2; 6.9% for Q3; and 7.0% for Q4, while expected headline CPI inflation at +4.5%, with projection 4.9% for Q1; 3.8% for Q2; 4.6% for Q3, and 4.5% for Q4. Meantime, the inflation projection for FY24 was unchanged at 5.4%, and real GDP growth was at 7.6%; i.e. overall inflation and GDP growth projections were almost the same.

Full text of RBI Monetary Policy statement: 5th Apr’24

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (April 5, 2024) decided to: Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

Assessment and Outlook

The global economy exhibits resilience and is likely to maintain its steady growth in 2024. Inflation is treading down, supported by favorable base effects though stubborn services prices are keeping it elevated relative to targets. As the central banks navigate the last mile of disinflation, financial markets are responding to changing perceptions of the timing and pace of monetary policy trajectories. Equity markets are rallying, while sovereign bond yields and the US dollar are exhibiting bidirectional movements. Gold prices have surged on haven demand.

The domestic economy is experiencing strong momentum. As per the second advance estimates (SAE), real gross domestic product (GDP) expanded at 7.6 percent in 2023-24 on the back of buoyant domestic demand. Real GDP increased by 8.4 percent in Q3, with strong investment activity and a lower drag from net external demand. On the supply side, gross value added recorded a growth of 6.9 percent in 2023-24, driven by manufacturing and construction activity.

Looking ahead, an expected normal south-west monsoon should support agricultural activity. Manufacturing is expected to maintain its momentum on the back of sustained profitability. Services activity is likely to grow above the pre-pandemic trend. Private consumption should gain steam with a further pick-up in rural activity and steady urban demand. A rise in discretionary spending is expected by urban households, as per the Reserve Bank’s consumer survey, and improving income levels augur well for the strengthening of private consumption.

The prospects of fixed investment remain bright with business optimism, healthy corporate and bank balance sheets, robust government capital expenditure, and signs of an upturn in the private capex cycle. Headwinds from geopolitical tensions, volatility in international financial markets, geo-economic fragmentation, rising Red Sea disruptions, and extreme weather events, however, pose risks to the outlook.

Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.0 percent with Q1 at 7.1 percent; Q2 at 6.9 percent; Q3 at 7.0 percent; and Q4 at 7.0 percent. The risks are evenly balanced.

Headline inflation softened to 5.1 percent during January-February 2024, from 5.7 percent in December. After correcting in January, food inflation edged up to 7.8 percent in February primarily driven by vegetables, eggs, meat, and fish. Fuel prices remained in deflation for the sixth consecutive month in February. CPI core (CPI excluding food and fuel) disinflation took it down to 3.4 percent in February – this was one of the lowest in the current CPI series, with both goods and services components registering a fall in inflation.

Going ahead, food price uncertainties will continue to weigh on the inflation outlook. An expected record rabi wheat production in 2023-24, however, will help contain cereal prices. Early indications of a normal monsoon also augur well for the kharif season. On the other hand, the increasing incidence of climate shocks remains a key upside risk to food prices. Low reservoir levels, especially in the southern states, and the outlook of above-normal temperatures during April-June, also pose a concern. Tight demand-supply conditions in certain pulses and the prices of key vegetables need close monitoring.

Fuel price deflation is likely to deepen in the near term following the recent cut in LPG prices. After witnessing sustained moderation, cost-push pressures faced by firms are showing upward bias. The recent firming up of international crude oil prices warrants close monitoring. Geo-political tensions and volatility in financial markets also pose risks to the inflation outlook.

Taking into account these factors and assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 percent with Q1 at 4.9 percent; Q2 at 3.8 percent; Q3 at 4.6 percent; and Q4 at 4.5 percent (Chart 2). The risks are evenly balanced.

The MPC noted that domestic economic activity remains resilient, backed by strong investment demand and upbeat business and consumer sentiments. Headline inflation has come off the December peak; however, food price pressures have been interrupting the ongoing disinflation process, posing challenges for the final descent of inflation to the target. Unpredictable supply-side shocks from adverse climate events and their impact on agricultural production as well as geo-political tensions and spillovers to trade and commodity markets add uncertainties to the outlook.

As the path of disinflation needs to be sustained till inflation reaches the 4 per cent target on a durable basis, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting. Monetary policy must continue to be actively disinflationary to ensure the anchoring of inflation expectations and fuller transmission. The MPC will remain resolute in its commitment to aligning inflation to the target. The MPC believes that durable price stability would set strong foundations for a period of high growth. The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted to keep the policy repo rate unchanged at 6.50 per cent. Prof. Jayanth R. Varma voted to reduce the policy repo rate by 25 basis points.

Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth. Prof. Jayanth R. Varma voted for a change in stance to neutral.

The minutes of the MPC’s meeting will be published on April 19, 2024.

The next meeting of the MPC is scheduled for June 5 to 7, 2024.

Full text of RBI Governor Das’s prepared MPC statement: 5th Apr’24

Decisions and Deliberations of the Monetary Policy Committee (MPC)

The Monetary Policy Committee (MPC) met on the 3rd, 4th and 5th April 2024. After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided by a 5 to 1 majority to keep the policy repo rate unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains at 6.25 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent. The MPC also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

I shall now briefly set out the rationale for these decisions. Since the last policy, the growth-inflation dynamics have played out favorably. Growth has continued to sustain its momentum surpassing all projections. Headline inflation has eased to 5.1 percent during January and February 2024 from 5.7 percent in December 2023, with core inflation declining steadily over the past nine months to its lowest level in the series. The fuel component of the CPI remained in deflation for six consecutive months. Food inflation pressures, however, were accentuated in February.

Looking ahead, robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4.0 percent. As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation. Under these circumstances, monetary policy must continue to be actively disinflationary to ensure the anchoring of inflation expectations and fuller transmission of past actions. The MPC, therefore, decided to keep the policy rate unchanged at 6.50 per cent in this meeting and remain focused on the withdrawal of accommodation. The MPC will remain resolute in its commitment to aligning inflation to the target.

Assessment of Growth and Inflation

Global Growth

The global economy has remained resilient with a stable outlook as reflected in various high frequency indicators. Global trade is expected to grow faster in 2024, although weaker than its historical average. Inflation is moving closer to targets, but the last mile of disinflation is turning out to be challenging. Services inflation in advanced economies remains sticky amidst tight labor markets. Accordingly, central banks are cautious in their communications, thereby tempering market expectations about the timing and magnitude of interest rate cuts later this year. Equity markets have gained while bond yields and the US dollar have remained volatile. The overall outlook is challenged by continuing geopolitical conflicts, disruptions in trade routes, and a high public debt burden.

In the last monetary policy statement, I expressed concerns about the high levels of public debt in both advanced and emerging market economies (EMEs). These are dormant risks that could erupt abruptly. Debt to GDP ratios, which rose during the pandemic, remain elevated and are projected to increase further with rising interest burden and cost of borrowing, thus raising debt sustainability concerns.

The worsening debt situation in advanced economies (AEs) can generate spillovers for EMEs in the form of swings in capital flows and volatility in financial markets. EMEs with rising levels of public debt, in particular, would be vulnerable to these spillover effects. Credible fiscal consolidation plans, particularly in major advanced economies, focusing on growth-enhancing investment would be necessary to address this challenge. India, however, presents a different picture on account of its fiscal consolidation and faster GDP growth.

Domestic Growth

Domestic economic activity continues to expand at an accelerated pace, supported by fixed investment8 and an improving global environment. The second advance estimate (SAE) placed real GDP growth at 7.6 percent for 2023-24, the third successive year of 7 percent or higher growth.

From the supply side, industrial activity led by manufacturing continued its momentum. The purchasing managers’ index (PMI) for manufacturing displayed a sustained expansion in February-March, touching a 16-year high in March. The services sector exhibited broad-based buoyancy with all sectors registering strong growth. The PMI services remained above 60 during February-March, suggesting sustained healthy expansion.

With rural demand catching up, consumption is expected to support economic growth in 2024-25. Urban consumption stayed buoyant as evident from various indicators. The resilience in cement production, together with strong growth in steel consumption and production and import of capital goods, augur well for the investment cycle to gain further traction. The total flow of resources to the commercial sector from banks and other sources at ₹31.2 lakh crore during 2023-24 is significantly higher than that of last year (₹26.4 lakh crore). External demand improved in February with exports registering double-digit expansion. The trade deficit, however, widened in February as imports also accelerated.

Going forward, the outlook for agriculture and rural activity appears bright, with good Rabi wheat crops and improved prospects of kharif crops, due to the expected normal south-west monsoon. Strengthening rural demand, improving employment conditions and informal sector activity, moderating inflationary pressures, and sustaining momentum in the manufacturing and services sector should boost private consumption.

As per our survey, consumer confidence one year ahead reached a new high. The prospects of investment activity remain bright owing to an upturn in the private capex cycle becoming steadily broad-based; persisting and robust government capital expenditure; healthy balance sheets of banks and corporates; rising capacity utilization; and strengthening business optimism as reflected in our surveys. Improving global growth and trade prospects, coupled with our rising integration in global supply chains, are expected to propel external demand for goods and services. The headwinds from protracted geopolitical tensions and increasing disruptions in trade routes, however, pose risks to the outlook.

Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.0 percent with Q1 at 7.1 percent; Q2 at 6.9 percent; Q3 at 7.0 percent; and Q4 also at 7.0 percent. The risks are evenly balanced.

Inflation

Turning to inflation, food price uncertainties continue to weigh on the inflation trajectory going forward. A record rabi wheat production would help temper price pressure and replenish the buffer stocks. Moreover, an early indication of a normal monsoon augurs well for the kharif season. International food prices also remain benign.22 The tight demand-supply situation in certain categories of pulses and the production outcomes of key vegetables warrant close monitoring, given the forecast of above-normal temperatures in the coming months. Frequent and overlapping adverse climate shocks pose key upside risks to the outlook on international and domestic food prices.

Cost-push pressures faced by firms are seeing an upward bias after a period of sustained moderation. Deflation in fuel is likely to deepen in the near term, following the cut in LPG prices in March. Notwithstanding the cut in petrol and diesel prices in mid-March, the recent uptick in crude oil prices needs to be closely monitored. Continuing geopolitical tensions also pose an upside risk to commodity prices and supply chains.

Assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 percent with Q1 at 4.9 percent; Q2 at 3.8 percent; Q3 at 4.6 percent; and Q4 at 4.5 percent. The risks are evenly balanced.

What do these Inflation and Growth Conditions mean for Monetary Policy?

Inflation has come down significantly but remains above the 4 percent target. Food inflation continues to exhibit considerable volatility impeding the ongoing disinflation process.25 High and persistent food inflation could unhinge the anchoring of inflation expectations which is underway. Our ongoing effort is to ensure fuller transmission of policy actions and anchoring of household inflation expectations. The strong growth momentum, together with our GDP projections for 2024-25 gives us the policy space to unwaveringly focus on price stability.

Two years ago, around this time, when CPI inflation had peaked at 7.8 percent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis. In other words, it is essential, in the best interest of the economy that CPI inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished.

The success in the disinflation process so far should not distract us from the vulnerability of the inflation trajectory to the frequent incidence of supply-side shocks. Our effort is to ensure price stability on an enduring basis, paving the way for a sustained period of high growth.

Liquidity and Financial Market Conditions

In the February monetary policy statement, I mentioned that liquidity conditions were driven by exogenous factors, which were likely to be corrected in the foreseeable future. Liquidity conditions eased during February and March in the wake of increased government spending, the Reserve Bank’s market operations, and the return leg of a USD-INR sell-buy swap auction. In particular, the liquidity situation improved in March with system liquidity turning intermittently surplus in the first half of the month. In these circumstances, the Reserve Bank conducted fourteen fine-tuning variable rate reverse repo (VRRR) operations during February and early March to absorb intermittent surplus liquidity.

Anticipating the seasonal tightening of liquidity at the end of March, the Reserve Bank injected liquidity through variable rate repo (VRR) operations – both main and fine-tuning operations. Consequently, the average borrowings under the MSF window moderated. Liquidity conditions have again turned surplus from March 30, necessitating VRRR auctions from April 2.

Reflecting these liquidity developments, the weighted average call rate (WACR) exhibited a softening bias and has hovered near the repo rate since the last policy meeting. In tandem, rates in the collateralized segment of the call money market have also softened. Financial conditions remained conducive as reflected in the reduced term spread in the G-sec market and stable risk premium in the bond market. In the credit market, monetary transmission continues to be a work in progress.

Looking ahead, the Reserve Bank will remain nimble and flexible in its liquidity management through main and fine-tuning operations in both repo and reverse repo. We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity to ensure that money market interest rates evolve in an orderly manner that preserves financial stability.

The Indian rupee (INR) has remained largely range-bound as compared to both its emerging market peers and a few advanced economies during 2023-24.35 The INR was the most stable among major currencies during this period. As compared to the previous three years, the INR exhibited the lowest volatility in 2023-24.36 The relative stability of the INR reflects India’s sound macroeconomic fundamentals, financial stability, and improvements in the external position.

Financial Stability

The latest data as of the end of December 2023 show that the key indicators of capital and asset quality of scheduled commercial banks (SCBs) continued to be healthy. The financial indicators of non-banking financial companies (NBFCs) are also in line with that of the banking system as per the latest available data.

Let me emphasize here that banks, NBFCs, and other financial entities must continue to give the highest priority to quality of governance and adherence to regulatory guidelines. Financial sector players, by and large, operate with public money – be they depositors in banks and select NBFCs or investors in bonds and other financial instruments. They should always be mindful of this. The Reserve Bank will continue to constructively engage with financial entities in this regard. It needs to be recognized that financial stability is a joint responsibility of all stakeholders.

The Reserve Bank has also been engaging with regulated entities and various stakeholders to simplify its regulations and reduce compliance burden. As part of this endeavor, the recommendations of the Regulations Review Authority (RRA 2.0) constituted by the Reserve Bank have been largely implemented. RRA 2.0 has set a new benchmark for meaningful engagement between the Regulator and the Regulated Entities.38 Moving further in the same direction,

Internal Review Groups were formed in 2023 to rationalize, simplify, and remove obsolete regulations and streamline reporting mechanisms. In pursuance of recommendations of RRA 2.0 and the Internal Review Groups, more than one thousand circulars have been withdrawn. A Master Direction for rationalizing and harmonizing supervisory returns has also been issued. The Reserve Bank will continue to follow a consultative approach and undertake a review of regulations in line with the evolving financial landscape.

External Sector

During the first three quarters of 2023-24, India’s current account deficit (CAD) narrowed significantly on account of a moderation in merchandise trade deficit coupled with robust growth in services exports and strong remittances. India’s merchandise and services exports have grown at a healthy pace in Q4:2023-24.40 India continues to be the largest recipient of remittances in the world. The cost of receiving remittances is gradually coming down. Overall, the CAD for 2024-25 is expected to remain at a level that is both viable and eminently manageable.

On the external financing side, India’s foreign portfolio investment (FPI) flows saw a significant turnaround in 2023-24. Net FPI inflows stood at US$ 41.6 billion during 2023-24, as against net outflows in the preceding two years (US$ 14.1 billion in 2021-22 and US$ 4.8 billion in 2022-23). This is the second-highest level of FPI inflow after 2014-15.

Net foreign direct investment (FDI) moderated to US$ 14.2 billion in April-January 2023-24 from US$ 25.0 billion a year ago. External commercial borrowings (ECBs) and non-resident deposits recorded higher net inflows compared to the previous year. The amount of ECB agreements also grew markedly during 2023-24 (up to February 2024). India’s foreign exchange reserves reached an all-time high of US$ 645.6 billion as of March 29, 2024. Latest data on various external vulnerability indicators suggest improved resilience of India’s external sector. We remain confident of meeting our external financing requirements comfortably.

Additional Measures

I shall now announce certain additional measures.

Trading of Sovereign Green Bonds in the International Financial Services Centre (IFSC)

To facilitate wider non-resident participation in Sovereign Green Bonds, a scheme for investment and trading in these Bonds in the IFSC will be notified shortly.

RBI Retail Direct Scheme - Introduction of Mobile App

The RBI Retail Direct Scheme was launched in November 2021. It is now proposed to launch a mobile app for accessing the Retail Direct portal. This will be of greater convenience to retail investors and deepen the G-sec market.

Review of Liquidity Coverage Ratio (LCR) Framework

Technological developments have enabled bank customers to instantly withdraw or transfer money from their bank accounts. While improving customer convenience, this has also created challenges for banks to deal with potential situations when, due to certain factors, a large number of depositors decide to instantly and simultaneously withdraw their money from banks. The developments in certain jurisdictions last year demonstrated the difficulties it can create for banks to deal with such situations. A need has, therefore, arisen to undertake a comprehensive review of the LCR framework for banks. A draft circular will be issued shortly for stakeholder consultation.

Dealing in Rupee Interest Rate Derivative products – Small Finance Banks

At present, Small Finance Banks (SFBs) are permitted to use only Interest Rate Futures (IRFs) for proprietary hedging. It has now been decided to allow SFBs to use permissible rupee interest derivative products. This will allow further flexibility to SFBs for hedging their interest rate risk and enhance their resilience.

Enabling UPI for Cash Deposit Facility

Deposit of cash through Cash Deposit Machines (CDMs) is primarily being done through the use of debit cards. Given the experience gained from card-less cash withdrawal using UPI at the ATMs, it is now proposed to also facilitate the deposit of cash in CDMs using UPI. This measure will further enhance customer convenience and make the currency-handling process at banks more efficient.

UPI Access for Prepaid Payment Instruments (PPIs) through Third-Party Apps

At present, UPI payments from Prepaid Payment Instruments (PPIs) can be made only by using the web or mobile app provided by the PPI issuer. It is now proposed to permit the use of third-party UPI apps for making UPI payments from PPI wallets. This will further enhance customer convenience and boost the adoption of digital payments for small-value transactions.

Distribution of Central Bank Digital Currency (CBDC) through Non-bank Payment System Operators

The CBDC pilots are currently in operation with an increasing number of use cases and participating banks. It is proposed to make CBDC Retail accessible to a broader segment of users by enabling non-bank payment system operators to offer CBDC wallets. This will also facilitate testing of the resiliency of the CBDC platform to handle multi-channel transactions.

Conclusion

As we progress towards RBI@100, the upcoming decade is going to be a transformational journey. The Reserve Bank will continue to focus on preserving financial stability and promoting a system that is robust, resilient, and future-ready to support economic growth. Price stability will be a key component of this endeavor.

Turning to the present, inflation is on a declining trajectory and GDP growth is buoyant. At this juncture, we should not lower our guard but continue to work towards ensuring that inflation aligns durably and sustainably to the target. Our goal is in sight and we must remain vigilant. We are inspired by the profound words of Mahatma Gandhi: “…One must persevere and have patience. Success is the inevitable result of such effort.”

Bottom line: RBI may cut from June’25, if the Fed goes for the same from Mar’25

Weekly-Technical trading levels: Nifty Future, USDINR

Whatever the narrative, technically Nifty Future (23015) now has to sustain over 23250 for any further rally to 23400/23525-23650/23850-24075 and even 25000-26000 levels in the coming days/weeks (if Modi indeed comes to power again with a comfortable majority of 300/350 or even 400+); otherwise sustaining below 23200/23150-23050/22850*, Nifty Future may fall again to 22600/22450-22350/22150 and 22000/21800*-21600*/21500 and further to 21175/21000*-20400/20000* and even 19700/19400-19200/18800 and even 18500*/17500-17300/15650 in the coming days (under, hung Parliament like scenario; if BJP/NDA indeed gets around 200 seats or INC/IND set to form the next government).

But even if BJP/Modi fails to form the next government and Nifty slumps 20%, it will be a wonderful opportunity to invest in blue chips at cheap/discounted valuation as IND/Cong policy may be at par with NDA/Modi or even better (if we compare previous performances); on the other side, if Modi/BJP/NDA indeed wins a comfortable majority this time with 300/350+ seats, then Nifty may jump another 10% to around 25000-25500 levels rather than 20% to 27500-28000 levels as market is already discounted to a great extent amid DIIs (Indian PPT) support. In that scenario, it may be also a wonderful opportunity to book windfall gain at a steep valuation and to enter again at lower/reasonable levels after some weeks/months.

Similarly USDINR (83.32) now has to sustain over 83.50 for a further rally to 83.75*/84.50-85.50/86.00 and further to 90.00-92.00 in the coming days (if India indeed goes for a hung Parliament followed by a non-BJP/NDA government); on the other side, sustaining below 82.95, USDINR may further fall to 82.75-82.25 in the coming days (under Modi 3.0).

Over the last few years, USDINR has largely been range-bound due to active RBI intervention to keep in the preferred range to support India’s exports and also to manage imported inflation. Also, USDINR is only a partially convertible currency and due to various regulatory hurdles, both local and global trading volume is very low. Whatever may be the election outcome, RBI may not allow it to move disorderly in the near term. But if India indeed goes for coalition politics at the Raisina Hill/Parliament Street (equivalent for US Capitol Hills) after ‘Modi Yug’ then USDINR may gradually move to the 85-90 range in the longer term rather than the current 82-85 range.

Higher USDINR is good for export-heavy Nifty earnings but may be bad for the import-heavy Indian domestic economy. India imports almost 85% of its crude oil requirement along with some other commodities, food items, and various industrial/consumer items and thus higher USDINR is bound to boost imported inflation, which will eventually make RBI’s job difficult for maintaining price stability. Also, higher inflation will create the vicious cycle of higher borrowing costs and lower supply for a huge & growing population of almost 1.5B people; and will cause more inflation in turn.

Despite elevated double-digit borrowing costs for business and personal loans (except home loans) for decades after decades, India’s total CPI inflation remains around 6% on average primarily due to the inadequate supply capacity of the economy compared to its huge population. Also, India has another problem of wage-inflation spiral and lower productivity, especially for government employees/ex-employees (getting lifelong family pensions), which is also boosting inflation (wage growth rate is higher than productivity). Also, there is huge income inequality in India’s private sector (formal/informal) and thus elevated inflation is now a big issue in this 2024 general election along with huge unemployment/under-employment even for educated youths/persons.

The Indian Federal government has given RBI the price stability target (CPI) of 4.00% with a lower-upper deviation band of 2-6%, which is very high compared to the standard 2% for developed economies. Against the 4% inflation target, India’s actual CPI is now around 5-6% on average for the last 10 years; i.e. average CPI/prices or cost of living has grown almost 50% in the last decade, while salary/wage/net income may have grown much lower for most of the private sector employees at lower end of the pyramid and also for most of the self-employed persons (except government contractors, eminent doctors, lawyers and certain other highly qualified/skilled professionals). Government employees/pensioners are enjoying almost assured salary/wage hikes of around 4-5% every year in line with growing inflation and most of them have earnings much more than their productivity levels.

But at the same time, these government employees of almost 50M (around 8% of the Indian labor force 600M) are also a great source of India’s discretionary consumer spending (growth) story, while a significant amount of government revenue (almost 35%) is being spent for meeting government’s wage bill. Almost 75-80% of the core tax revenue of the Indian Federal government is being spent on interest on public/government debt and government wage bills alone (mandatory expenses). After committing various Fedral government sponsored social safety grants & subsidies, the government has no option but to borrow to fund the entire CAPEX (infra development).