A pragmatic policy

Growth prospects are robust domestically. Key drivers on the demand side, household consumption will improve further, while prospects of fixed investment remain bright

The concluding MPC decision for FY24 was on expected lines in terms of a status quo. The macroeconomic assessment also was on expected lines. Although global growth is projected to stay steady in 2024 by most forecasts, there remains an element of uncertainty in the outlook, given the continued trends in geoeconomic fragmentation. The global inflation is correcting and expectations of reversal in interest rate cycle are building up.

Domestically, the growth prospects are robust. The key drivers on demand side, household consumption will improve further, while prospects of fixed investment remain bright.

Inflation is expected to move into the tolerance band in FY25. However, the entire outlook is based on the trajectory of the food inflation which displays usual seasonal correction in vegetable prices. Importantly, core inflation decline is possibly reflecting the vicissitudes of a shift in household preferences to online buying from offline buying. If this becomes a long-term trend, it could impact a downward bias to core CPI on a sustained basis. With system liquidity in the deficit mode, the impact of liquidity overhang on inflation going forward is also minimal.

However, the liquidity deficit has increased since the last policy on December 23. Net LAF has remained in the deficit mode since mid-Sep’23, with an average of Rs 1.8 lakh crore post December 23 policy. However, the build-up of government cash balance is also because of the government moving into a Just in Time/JIT mechanism of spending whereby government cash balances will remain with RBI till transfer is made to stakeholders. We expect this may have wide ranging ramifications on the banking system liquidity.

The JIT mechanism to streamline funds transfer to states under Centrally Sponsored Schemes juxtaposed against a declining CASA ratio of ASCBs (40.5 per cent as on Sep’23 vis-à-vis 43.1 per cent on March '23 / 45.2 per cent on March’22) with incremental large shift to time deposits and alternative avenues like mutual funds may ensure reliance on other-than-deposit sources. This could keep short term yields higher and a downward floor of interest rates on advances.

On the regulatory and development side, a range of announcements have been made.

Given the developments and deepening of both onshore and offshore foreign exchange markets, the RBI has decided to review the Regulatory Framework for Electronic Trading Platforms.

In banking, the RBI has proposed a Key Fact Statement (KFS) for loan products. The KFS will contain information regarding a loan agreement, including all-in cost of the loan. The major extension includes KFS for MSME sectors. Given the level of financial exclusion in this segment, this move will allow better decision making on the part of MSMEs. Further, this decision extends to NBFC involved in SME lending including fintech.

With respect to payments systems and fintechs, Aadhaar Enabled Payment System (AePS) onboarding will now be more stringent with an aim to include mandatory due diligence, for AePS touchpoint operators, to be followed by banks.

The technology in terms of authentication of payments has received fresh attention. Accordingly, a principle-based “Framework for authentication of digital payment transactions” will be explored for orderly development of this space.

Lastly, CBDC as a use case will be expanded to include pre-defined payment and offline functionality for enabling transactions in areas with poor internet connectivity. 

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