Rate Cut On Horizon As Economic Conditions Normalise, Says HSBC’s Pranjul Bhandari
While urban demand has cooled, rural demand has yet to gain traction. Bhandari expects that as farmers sell their kharif produce in the coming months, rural spending will increase.
The possibility of an impending rate cut emerged as a significant theme in the aftermath of the Reserve Bank of India's latest Monetary Policy Committee meeting.
Pranjul Bhandari, chief India and Indonesia economist at HSBC, observed that while the RBI has maintained its benchmark rate, a shift towards a more neutral stance signals a rate cut may not be far off, contingent on evolving economic conditions.
Bhandari pointed out that the MPC's decision was in line with market expectations, acknowledging the need for a more accommodative policy, given recent economic indicators. “We anticipated an easing of the stance from hawkish to neutral, but not an immediate rate cut,” she stated. This cautious optimism stems from the observation that high-frequency growth indicators, such as PMI and tax collection, have softened recently, suggesting a slight slowdown in economic momentum.
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A key takeaway from Bhandari’s insights is the importance of India’s robust foreign exchange reserves, which currently stand at $7 billion. These reserves will help the country navigate potential external shocks, allowing the RBI to prioritise domestic economic conditions in its policy decisions, she said. “Monetary policy will be determined by domestic considerations and not global factors because we have sufficient forex reserves,” she said.
Bhandari also discussed the ongoing transition in economic activity from urban to rural areas. While urban demand has cooled, rural demand is yet to gain traction. She expects that as farmers sell their kharif produce in the coming months, rural spending will increase. “Right now, we are in a no-man’s land where urban demand has slowed, and rural demand hasn’t yet picked up,” she noted.
On economic growth, Bhandari projected a forecast close to 7%, slightly below the RBI's estimate of 7.2%. She expressed caution, highlighting potential risks stemming from global factors, such as commodity price fluctuations and the ongoing reshaping of global supply chains, particularly in the context of the 'China plus one' strategy. These are medium-term considerations that could significantly impact growth, she explained.
As for liquidity in the market, Bhandari acknowledged that while it had become less of a constraint recently, it remained an important factor for capital expenditure initiatives. “Liquidity matters, but only on the margin,” she said, pointing to improvements in government spending and an easing of tight conditions from earlier in the year.
While Bhandari remained cautious about immediate growth prospects, she also recognised the necessity for the RBI to adapt its policies in response to domestic economic dynamics. As conditions continued to normalise, a rate cut could indeed be on the horizon, helping stimulate growth in the Indian economy.
