Normality still eludes……Pause continuedBy Deepak Jasani The RBI MPC voted unanimously to keep the policy repo rate unchanged at 6.5% on Dec 8, its fifth consecutive pause, as the near-term outlook is masked by risks to food inflation which might lead to an inflation uptick in November and December. Consequently, the standing deposit facility (SDF) rate will remain unchanged at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. The MPC continued with the ‘withdrawal of accommodation’ stance (with a 5:1 majority). The RBI seemed less hawkish on liquidity management compared to the previous policy. Due to tight liquidity conditions with system liquidity turning into a deficit in September, RBI proposed to allow reversal of liquidity facilities under Standing Deposit Facility and Marginal Standing Facility even during weekends and holidays with effect from December 30, 2023, to better manage liquidity. However, the governor emphasized that the use of OMO sales in the future is not off the table if liquidity surplus increases significantly. Over the last year, monetary policy measures to drain out excess liquidity, alongside supply-side measures taken by the government, have worked well to control inflationary pressures. Core inflation has trended lower and household inflation expectations have become better anchored. The growth has remained resilient and robust, surprising everyone on the upside. FPI flows have seen a significant turnaround in 2023-24 with net FPI inflows of US$ 24.9 billion (up to December 6) as against net outflows in the preceding two years. Deficit liquidity conditions persisted during October and November. However, going forward, government spending is likely to ease liquidity conditions. Economic activity exhibited buoyancy in Q2 aided by strong domestic demand resulting in robust GDP growth of 7.6%. The manufacturing sector gained strength by easing input cost pressures and pickup in demand conditions. The services sector buoyancy has remained intact as reflected in high-frequency indicators. GST collections at ₹1.68 lakh crore in November 2023 were buoyant. Taking all these factors into consideration, RBI has increased its real GDP growth to 7% for FY24 from 6.5% earlier amid continued strength in manufacturing activity and gradual recovery in rural consumption. Interestingly, for the next fiscal year, RBI GDP projections remain on the higher side at 6.7% and 6.5% in Q1 & Q2 FY25, respectively. This could mean that the monetary policy may not loosen up soon or this projection may be assuming easing that will help keep growth rates higher. RBI continues to remain vigilant and ready to act as per the evolving outlook to address potential risks, as was seen by the pre-emptive measures to curtail the growth of unsecured loans. With buoyancy in capex and spending and gradual improvement in rural demand, India is better placed to withstand the uncertainties. But the RBI continues to target 4.0% CPI. Consequently, a rate cut soon remains unlikely. We expect a rate cut perhaps in Q1FY25 but that would be data-dependent. Long-term G-sec yields have softened from recent highs reflecting strong demand for these bonds from financial institutions and softening of global bond yields. 10-year G-sec yields remained largely unchanged post the announcement as monetary policy transmission continues to work its way through the system. Equity markets will take positive cues from the policy on growth and inflation front.
Logistics, good or bad, are driven by the states and the commerce ministry has a LEADS (Logistics Ease Across Different States) report, based on perceptions. The 2023 version was released in December. Since states are heterogenous, in the reporting, they are divided into four groups—coastal, landlocked, north-east, and UTs. States that do well are called achievers. Nomenclature matters. Thus, states that are middling aren’t called average. They are called fast movers. States that are sub-par are called aspirers. Let me highlight coastal states, since 75% of export cargo is estimated to originate from them. Among coastal states, ones that do well are Andhra Pradesh, Gujarat, Karnataka, and Tamil Nadu. The ones that lag are Goa, Odisha, and West Bengal. While India’s logistics performance may have improved over time, that’s not true of every state. Some have slipped. Most states have a state-level logistics policy, including Goa and Odisha. West Bengal, bottom of the pecking order in the coastal category, doesn’t have one. To quote from LEADS 2023, “Looking ahead, the State (West Bengal) could benefit from formulating a State Logistics Master Plan and State Logistics Policy to drive efficiency improvements and facilitate investments within the logistics sector and undertake consultation with the logistics stakeholders for educating and informing them about the initiatives State is undertaking for the development and improvement of logistics sector.”
Logistics has been talked about for a long time and India has also focused on improving performance. We are now getting some precise data on measurement and quantification. That helps.
Bibek Debroy, chairman, EAC-PM. Views are personal.