RBI’s unchanged rates: Implications for India Inc CFOs

Sakshi Gupta, Principal Economist – HDFC Bank, discusses the implications of RBI’s decision to maintain unchanged interest rates.

This prudent move by the RBI, yet again, has effectively instilled stability in the credit market, leading to a notable surge in capital expenditure and investments. Furthermore, the downward revision of inflation projections signifies a promising outlook for higher GDP growth and increased credit offtake, ultimately providing favourable outcomes for the markets. Below are the edited excerpts:

Q. How does the RBI’s decision to keep the policy rate unchanged impact India Inc’s borrowing costs and investment decisions?

Sakshi: The unchanged policy decision aligns with the objective of reducing inflation while also providing support for growth. The RBI’s policy stance reflects optimism towards growth prospects and indicates a favourable environment for private investments, especially in terms of borrowing costs. It appears that borrowing costs have reached their peak and are expected to remain at current levels unless the RBI initiates rate cuts in the future.

Q. What are the potential implications of the RBI’s commitment to anchoring inflation close to 4% for India Inc, particularly for CFOs managing pricing and cost considerations?

Sakshi: This is a positive development because it implies that the RBI is actively working towards reducing inflation to a sustainable level of 4%. This target has significant advantages, including a positive impact on input costs, such as wage increases, for various sectors. As a result, it instils a greater sense of confidence in maintaining price stability, which is highly beneficial for corporate enterprises.

Q. How might the uncertainty surrounding weather disturbances, such as El Nino, affect the inflation and rural recovery outlook for India Inc?

Sakshi: The El Nino situation remains highly uncertain due to its evolving nature. Currently, the Indian Meteorological Department (IMD) predicts a normal monsoon. However, we need to closely monitor the spatial and temporal distribution of rainfall and any potential challenges posed by El Nino. Additionally, the Indian Ocean Dipole effect could also come into play. The prevailing uncertainty surrounding these factors raises concerns, as a worsening condition such as this could adversely affect food prices, production, yields, and rural income. It is prudent to exercise caution until we gain further clarity on how these risks unfold.

Q. Considering the improved liquidity conditions and the RBI’s focus on aligning the overnight call money rate to the repo rate, how can CFOs in India Inc optimize their liquidity management strategies?

Sakshi: The RBI continues to maintain its stance on withdrawing accommodation, which involves reducing liquidity from the system. However, they emphasize that this withdrawal should not have a detrimental impact. The RBI commits to conducting operations for liquidity management on both sides, meaning they will address acute liquidity shortages by providing ample liquidity to support growth. Nevertheless, it’s crucial to acknowledge that we are transitioning to a different liquidity range or conditions compared to the pandemic year. Therefore, we must acknowledge the need to diminish the substantial liquidity surplus we experienced before and adapt to lower liquidity assumptions in the system.

Q. What are the potential implications of the market’s reaction to the policy outcome, particularly in the bond market and the USD/INR exchange rate?

Sakshi: The market reaction is expected to be moderate as the policy announcement aligns with prevailing expectations. The 10-year bond yields have been range-bound and are likely to continue in that manner. However, there might be some volatility ahead due to global events and actions taken by global central banks, necessitating close monitoring. Similarly, the rupee has maintained a range-bound movement over the past 6-8 months, with potential positives on the horizon such as a lower current account deficit and strong portfolio inflows. This could lead to rupee appreciation. Nevertheless, the RBI is expected to intervene to prevent any excessive appreciation or depreciation, ensuring greater stability and limited movement for both the 10-year benchmark bond yields and the rupee.

Q. In light of the RBI’s policy review and the projections provided by HDFC Bank, what are the key recommendations for CFOs in India Inc to navigate the evolving economic landscape and optimize their financial decision-making processes?

Sakshi: Vigilance is required for both global and domestic risks. It is evident that growth will decelerate this year, despite some domestic support. Companies with exposure to the agriculture sector or rural economy should closely monitor the monsoon situation.

On the global front, factors such as the pace of inflationary pressure, monetary policy rate hikes by major central banks like the US Federal Reserve or the European Central Bank, and concerns about a potential recession in those economies can impact our export growth. Export-oriented companies need to exercise caution.

While India may be relatively resilient, it is important to acknowledge that we are not entirely immune to global developments. Also, the forthcoming monsoon situation domestically will be of utmost importance to monitor. A cautious outlook is advisable as we navigate these uncertainties.