Navigating economic horizons: RBI’s role in FY 2024-2025

In the new financial year 2024-2025, all eyes are on the Reserve Bank of India and its actions that will shape the country’s economic landscape.

With the first monetary policy committee meeting for FY25 being on the hawkish side, the market is eager to gauge how and when will the central bank’s stance change amidst the inflationary pressure sustaining.

The RBI’s decisions in the coming months are expected to play a pivotal role in steering economic growth, managing inflationary pressures, and bolstering investor confidence amidst evolving domestic and global dynamics.

What can we expect from RBI in the financial year 2024-2025?

As the Reserve Bank of India gears up for its monetary policy committee meetings in the financial year 2024-2025, market participants are closely watching for signals and decisions that could impact India’s economic trajectory.

India’s economy showcased robust growth in the fourth quarter of 2023, registering an impressive 8.4% expansion and have been above 8% for the past 3 quarters, the fastest among major economies.

However, inflation remains a concern, hovering near the upper band of the RBI’s 2%-6% target.

The first MPC meeting for FY25 was dusted off, five out of six members of India’s rate-setting committee voted for a pause, maintaining the monetary stance at ‘withdrawal of accommodation’.

Gist of the April 2024 MPC meeting

As the April MPC meeting concludes, and RBI maintains the status quo on the repo rate at 6.50%, the growth and inflation forecasts remain unchanged at 7% and 4.5%, respectively.

This decision is primarily driven by a combination of factors, including sustained economic growth, elevated inflation levels, and global economic dynamics.

Well, the status quo approach came amidst a discomfort with the volatile behavior of the food component of inflation. Food prices can be unpredictable and can significantly impact overall inflation levels.

The RBI likely considered this volatility as a risk factor in its decision-making process and believes that more time and consistent policy measures are needed to bring inflation under control and sustainably achieve the target.

Further, RBI shall keep liquidity neutral so that further transmission of higher rates can continue to bring down inflation which is still higher at around 5.09%.

Well, by the second quarter of FY25, the US FOMC is expected to start the rate cut cycle, there is an ambiguity regarding when will the RBI start cutting, with varying predictions ranging from the third to the fourth quarter of FY 2025.

Predictions for FY25

While headline growth appears strong, private consumption lags, contrasting with robust government expenditure. RBI Governor Das anticipates rural demand, improving employment, and easing inflation to bolster private spending.

The investment outlook remains positive due to rising private capex, sustained government spending, and healthy bank and corporate balance sheets. However, the Monetary Policy Committee (MPC) exercises caution, wary of premature rate cuts amid incomplete transmission of previous hikes.

With India’s robust growth, the RBI opts to wait for global peers to ease monetary policies before considering further cuts, aiming to gradually steer inflation towards the 4% target.

While immediate rate cuts may not be on the horizon, gradual easing could be expected later in the fiscal year, depending on evolving economic indicators and global developments.

Median forecasts suggest the repo rate could reach 6.25% by September’s end and 6.00% by the year-end, indicating a potential downward trajectory in interest rates.

n conclusion, the expectations from the RBI in FY24-25 revolve around a balanced approach aimed at fostering growth, managing inflation, and responding prudently to domestic and global economic dynamics.

Dividend to government

The Indian government anticipates that its dividend income from the Reserve Bank of India for the current financial year ending in March will remain consistent with levels seen in the previous financial year.

n the fiscal year 2022/23, the RBI board approved a surplus transfer of Rs 87,416 crore ($10.55 billion) to the government, which was disbursed in May 2023 but is accounted for in the government’s fiscal year 2024.

Looking ahead to fiscal 2025, the government has projected a surplus transfer of Rs 1.02 lakh crore from both the RBI and public sector banks.

Currently, the government is maintaining modest cash reserves to fulfill its spending obligations for the ongoing fiscal year. It plans to assess its borrowing needs through treasury bills soon to explore the possibility of reducing them.

Borrowing plans of the government

The Reserve Bank of India plays a pivotal role in supporting the Indian government’s ambitious borrowing target of Rs 7.50 lakh crore for the first half of the fiscal year 2024-25 (Rs. 14.13 lakh crores for a full year).

This significant borrowing plan constitutes 53% of the total FY25 target. Well, the same was at nearly 8.42% down from the last FY 2024 having a 15.43 lakhs borrowing despite being an election year.

Lesser government borrowing may indicate fiscal discipline and responsible financial management. This can boost investor confidence in the economy, leading to increased investment inflows.

If foreign investors perceive India as a stable and attractive investment destination, they may increase their investments in Indian assets, which can lead to an appreciation of the rupee.

Further, the inclusion of India’s government bonds in JP Morgan’s GBI-EM index heralds a significant milestone for the country and underscores its growing global economic stature. The same shall bring in nearly $ 23 billion into the country.

Inclusion in global indexes can improve liquidity in the Indian bond market as it attracts a broader pool of investors. Foreign investors, particularly institutional investors like pension funds and sovereign wealth funds, often have longer investment horizons.

Their participation in the Indian bond market can provide longer-term financing for government projects, reducing the need for frequent refinancing and lowering overall borrowing costs.

Reserves Management

India’s foreign exchange reserves surged to a more than two-year high of $648 billion as of April 5, 2024, driven by robust inflows and strategic interventions by the Reserve Bank of India.

Looking at the numbers, since Oct 2022 till date, RBI has loaded over $115 billion and the FII flows have been nearly $51 billion whereas the FDI flows have been also around $51 billion.

Against a total FDI and FII flows of $102 billion, RBI has bought $118 reserves in its kitty. This data clearly signifies RBI’s strategy of building reserves.

Will these reserves come to Rupee’s Rescue?

The Reserve Bank of India has strategically accumulated foreign exchange reserves to enhance India’s resilience against potential outflows during uncertain periods.

By fortifying its reserves, particularly through an increased emphasis on gold holdings, the RBI aims to mitigate currency risks and navigate global economic fluctuations effectively.

This proactive approach not only aids in mitigating sudden capital outflows’ impact but also ensures a favorable import ratio for India, contributing to overall economic stability.

In conclusion, the Reserve Bank of India enters the financial year 2024-2025 with a nuanced approach, balancing the economic growth, inflation management, and financial stability. The upcoming monetary policy committee meetings are poised to reflect this strategic outlook, with expectations of a cautious yet proactive stance on policy rates.

What would be the RBI’s rhythm for the rupee for 2025?

In FY 2024-2025, the RBI’s stance and approach lean towards stabilizing the rupee against the dollar. Gradual interest rate easing leading to favorable interest rate differentials, and tall forex reserves, all serve to strengthen the rupee and boost investor confidence.

Further, a reduced current account deficit and trade deficits shall help the rupee remain stable to positive. Despite the current knee-jerk, India’s strong economic fundamentals (fastest-growing economy, stable inflation, robust PMI, CAD reduction, and favorable FPI/FDI environment) shall align with the Rupee’s value and it suggests the rupee appreciation towards 83.00 to 82.50 levels in the near to mid-term.

Simultaneously, we anticipate that the RBI might intervene to prevent the Rupee  ..

Amit Pabari is a managing director ar CR Forex Pvt Ltd. The views expressed in this article are his personal views.

Source: https://rb.gy/13r443