RBI's growth, inflation projection offers comfort to markets and investors

State of government finances, concessions offered to tax-payers, and the commitment to progress on the fiscal glide path is eminently complemented by the monetary measures makes this policy different

The monetary policy statement by the Reserve Bank of India (RBI) reflects a unique and natural confluence of fiscal and monetary policy measures. The RBI while maintaining the neutral stance has cut the Repo Rate by 25 basis points taking the Repo Rate to 6.25 per cent. This is the first in a series of rate cuts that the market may witness over the next one year or more. This monetary action complements a series of fiscal measures announced in the recent Union Budget. 

 

The state of government finances, the concessions offered to tax-payers, and the commitment to progress on the fiscal glide path is eminently complemented by the monetary measures. This is what makes this policy different. The fiscal glide path is intact with the fiscal deficit lower at 4.80 per cent for FY25, and for FY26 the estimated fiscal deficit is 4.40 per cent. The government borrowing program for FY26 is higher by 5 per cent compared to last year’s level. 

 

 

In terms of gross borrowing, the small rise in the borrowing programme, by just 5 per cent, is in consonance with the projected GDP growth and the rate of inflation. The net borrowing is higher by a small amount of Rs 11,000 crore. This needs to be understood better against the background of a Rs 1 lakh crore being put in the pockets of taxpayers so that it could help consumption and investments. These fiscal measures have made it possible for the RBI to initiate more accommodative measures.

 

The policy attempts an appropriate trade-off between the requirements of growth and inflation. The emerging growth-inflation dynamics in the view of the central bank “opens up space for the MPC to support growth.” The policy also takes cognisance of the sequential moderation in inflation, and the average inflation for FY25 is placed at 4.80 per cent, and for FY26 the level forecast is as low as 4.20 per cent. GDP growth is expected to be around 6.40 per cent for FY25, and 6.70 per cent for FY 26. The fall in food prices and better crops may ensure lower prices, along with stable crude prices in overseas markets. Therefore, the projected numbers both for growth and inflation afford a lot of comfort to the markets and investors. 

 

The intent to support growth while keeping a watch on potential inflationary pressures would be the most appropriate approach warranted by the data points available at this juncture. The fears around liquidity deficit and also the Rupee depreciations have also allayed by the central bank. The liquidity deficit has improved from a level upwards of Rs 2 lakh crore to less than Rs 1 lakh crore as of today due to a number of measures including a CRR cut, OMOs, and VRRs, and also the Dollar-Rupee Swap. The policy instils immense confidence in the markets that issues will be addressed appropriately and effectively.

 

The immediate response of the markets has been to factor in the Repo Rate cut, and accordingly the call money rate traded lower to 6.25 per cent - 6.50 per cent. But the bond yields have moved up by 3 to 4 basis points. In the case of bond yields, this may be viewed as an immediate reaction of not getting all that was expected by the market. Ultimately, yields across the maturity spectrum will gradually move lower. 

 

There is room for further rate cuts during the course of this year and next year, and the magnitude of the same could be anything from 75 basis points to 100 basis points. A positioning of investment portfolios accordingly could bring in good dividends in those accounts where the risk profile permits the exposure.   (Disclaimer: Dr Joseph Thomas is head of research at Emkay Wealth Management. Views expressed are his own.)