A wholesome policy

Central Bank actions are often equalled to watching the paint dry, colloquially dubbed a long phenomenon laced with perseverance. The MPC on Friday trudged along the anticipated trajectory, keeping rates unchanged while remaining aligned with focus on withdrawal of accommodation to ensure inflation progressively aligns to 4 per cent.

While the year 2024 started on an auspicious omen, it has quickly turned into a bellwether of geopolitical uncertainty with Brent hovering above $91 as Middle East again turned into a battle zone with retaliation writ large in the air. Intensifying tensions could have a direct bearing on supply route blockages and cargo vehicle fearing attacks could aggravate the situation further. 

Domestically, however, the economy continues on a strong footing. With a gross investment rate at 33.3 per cent for FY25 as per professional forecasters, a 7 per cent  growth rate assumption by RBI implies an ICOR at 4.75, well above the 4.28 for FY24. Alternatively, the 7 per cent  growth forecast for FY24 with a 4.28 ICOR could thus be a clear underestimate (6.5 per cent  first forecast by RBI for FY24 turning out to be 8 per cent in the final analysis). Inflation is likely to tread lower as per RBI forecast to 4 per cent in FY26 opening up the space for prolonged rate cuts by RBI beginning late FY25 even as US Fed has given an indication of a long wait and watch. But there could be possibility of increasing divergence in timing of rate cuts by RBI and Fed in FY25 as and when it happens.  On the development front, the trend to deepen the options under digital payments continues. The RBI has decided to facilitate cash deposit facility through use of UPI. This proposal complements the existing card-less cash withdrawal at ATMs using UPI. Furthermore, RBI has permitted linking of PPIs through third-party UPI applications. This will enable PPI holders to make UPI payments like bank account holders.  The CBDC-Retail will now be accessible to non-bank payment system operators. This is expected to expand choices available to users apart from testing the resiliency of CBDC platform handling multi-channel transactions.

On the banking side, the review of LCR norm is a smart move as owing to the 24*7 payment systems, banks were keeping more than sufficient funds / unusable liquidity as cushion to enable probable large outflows post business hours/on Saturdays in particular as RTGS/NEFT funds movement in large value affects funds management capability. The possible release of this unusable liquidity could now help to ameliorate frictional liquidity mismatches. 

Further, the small finance banks will now be allowed to participate in Rupee Interest Rate Derivative, offering Regulated Entities sustainable avenues to hedge their underlying exposure, without being susceptible to vagaries of such products having a forex legged connotation and ensuing volatility.  On the financial market side, the announcement includes the retail access to NDS-OM using API. The existing RBI retail direct can now be accessed using mobile app for greater convenience.  Lastly, with view to meet the growing demand for fund, the RBI has decided to permit eligible foreign investors in the International Financial Services Centre (IFSC) to also invest in green bonds. The cumulative expenditure needed for adaptation in a Business as Usual (BAU) scenario, is estimated to be ~56.7 trillion till 2030 for India, assuming FY24 as base year. 

(The author is Group Chief Economic Advisor, State Bank of India. Views are personal)