Balancing Growth and Inflation in India’s Economy

Balancing Growth and Inflation in India’s Economy

Sub : ECO

Sec : Monetary Policy

Key insights from RBI Governor Shaktikanta Das on inflation, growth, and liquidity management.

Inflation-Growth Dynamics:

• Current State:
  • The balance between inflation and growth is currently unsettled, primarily due to higher-than-expected inflation in September and October, driven by food prices.
  • Growth has moderated, with GDP growth projections for FY25 revised to 6.6% from 7.2%.
• RBI’s Commitment:
  • The RBI aims to restore this balance using various policy instruments while preserving the credibility of the flexible inflation targeting framework.
  • Focus remains on bringing inflation closer to target levels for sustainable economic growth.

Liquidity Conditions:

• Tight Liquidity Outlook:
  • Expected due to factors like tax outflows (direct taxes in December, GST thereafter), increased currency circulation during the busy credit and agricultural season, and capital outflows from Foreign Portfolio Investors (FPIs).
  • The recent Cash Reserve Ratio (CRR) hike, termed a temporary measure, has served its purpose and is being normalized.

Growth Projections and Investment Challenges:

• Growth Slowdown:
  • Q2 GDP slowdown is attributed to challenges in:
    • Demand Side: Weak investment activity.
    • Supply Side: Decline in manufacturing due to reduced sales growth caused by inflation affecting urban consumers.
  • Future Outlook:
  • The RBI projects a gradual recovery in the growth rate to 6.9%-7.3% in the second half of the fiscal year and into FY26.

Secured Overnight Rupee Rate (SORR):

• New Benchmark:
  • Replaces the Market Repo Overnight Rate (MROR) with the SORR to include all secure transactions such as TREPS (Treasury Bill Repurchase Agreements), which accounts for 60% of the market.
  • Improves market liquidity monitoring and transparency.

Food Inflation and Policy:

• Discussions with the government aim to tackle food inflation, though specific measures were not disclosed. Addressing food inflation is vital to achieving broader inflation goals.

Secured Overnight Rupee Rate (SORR) –

It is a benchmark for interest rates in India that is based on secured money market transactions. The Reserve Bank of India (RBI) proposed the SORR to improve the credibility of interest rate benchmarks and develop the interest rate derivatives market. It will replace the Mumbai Interbank Offer Rate (MIBOR):

A trade-based rate that will be based on actual transactions in secured money markets, such as basket repo and TREP. This will make it more resistant to manipulation and reflective of real market dynamics.

Secured Overnight Financing Rate (SOFR)

It is a benchmark interest rate used for dollar-denominated loans and derivatives, designed to replace the London Interbank Offered Rate (LIBOR). It is based on actual transactions in the Treasury repurchase market, where overnight loans are backed by U.S. Treasury securities.

It is preferred over LIBOR as it is derived from observable market data rather than estimates.

What is LIBOR?

The London Interbank Offered Rate (LIBOR) has been a global benchmark interest rate for short-term borrowing between banks.

What is MIBOR?

The Mumbai Interbank Offered Rate (MIBOR) is India’s equivalent of LIBOR and is a benchmark interest rate used for short-term lending between banks in the Indian interbank market. It is a polled rate derived by collecting data from participants and averaging the responses after excluding outliers.