Sitharaman, Powell toss the ball in Das’s court
Wednesday night, the Federal Open Market Committee (FOMC) decided to maintain the status quo on policy rates for the fourth successive review. The Committee reiterated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two percent.” The Committee however made it quite clear that any rate hike from the present level is no longer on the table.
In the post-meeting press meeting, Fed Chairman Jerome Powell indicated that FOMC may not consider rate cuts in its next meeting in March 2024. The market is thus expecting a rate cut in May 2024.
In another development, the Union Finance Minister, Ms. Nirmala Sitharaman, presented an interim budget for the fiscal year 2024-25. Two notable features of the interim budget were (i) Nominal GDP growth projection for FY25 at 10.5%, implying a well-controlled inflation environment; and (ii) Fiscal deficit of 5.1% of GDP for FY25BE, implying a strong commitment to fiscal discipline.
In line with the lower fiscal deficit projection, the borrowing program of the government has also been moderated. The finance minister has proposed Rs11.75trn of net borrowing from the market by way of fresh government securities in FY25BE against Rs11.80 borrowed in FY24RE. This shall leave decent scope for private investment.
In her speech, the finance minister also emphasized the supportive environment her government is building for acceleration in private capex to achieve the high growth targets. The minister has provided higher allocation for production-linked incentives (PLI).
With the global rate and monetary policy environment set to become benign in 2H2024; domestic macro (fiscal deficit, inflation, external conditions, etc.) improving and the government holding its side of promise to maintain fiscal discipline despite forthcoming general elections, the ball is now in the court of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to provide impetus to the economic growth.
The risks to inflation now mostly stem from food (inclement weather) and energy (geopolitical disruptions) which may not have a significant correlation with the policy rates. It would therefore be in order for RBI to guide a lower rate path and increase system liquidity.
The MPC meeting next week therefore will be watched with keen interest. I would not expect any immediate rate cut (though it will be welcome if happens), a clear guidance for lower rates going forward and enhanced system liquidity is what I do expect from MPC. If RBI delivers on these expectations, markets could rally to new highs led by financials and rate-sensitive sectors like auto and real estate.
