Waiting for a rate cut

Dear Readers,

Remember last year McDonald’s and Burger King dropped tomato from burgers due to its high prices. Restaurants remove tomatoes and onions from their complimentary salad when the prices shoot up. Most of the time, food inflation is to be blamed for a spike in overall inflation in India. The current rise in inflation is also because of food inflation. Data released this week shows that inflation for October rose to 6.21% from 5.49% in September. It is above the Reserve Bank of India’s (RBI) to lerance band of 4% to 6%. While vegetable prices are a major reason for the jump, the impact will be on interest rates, which would affect your loan EMIs.

The long wait

I am reminded of the famous play “Waiting for Godot” by the French playwright Samuel Becket. The two characters Vladimir and Estragon are waiting near the tree for Godot, another character. They talk about thieves, the bible, dreams and many other things. Both get hungry but still they wait. Two more people join them while passing through the tree and leave after some time. Later a boy comes and tells them that “Godot will not come today, but he will come tomorrow”. The next day, both o f them wait for Godot under the same tree. They again talk and discuss things. Two people who came yesterday also come and leave. The same boy comes again and says, “Godot will not come today, but tomorrow”. Vladimir and Estragon look at each other and decide to leave... but nobody moves and the curtain falls.

What we understand is that Godot is not going to come but they still wait for him. Similarly, we don't know when the rate cut will come, but we have been waiting for more than a year. Even the government is nudging the RBI to cut rates as this week Union commerce minister Piyush Goyal said the central bank should cut interest rates and give an impetus to growth.

Using food inflation, which restricted the RBI from any rate action for two years in the rate setting is a "flawed theory", he said.

Expectations for rate cuts in the upcoming December and February monetary policies were high, especially after the US Federal Reserve cut rates by 50 basis points. Many economists including top bankers were expecting a rate cut in December. However, now there are two views. A few analysts believe that the rate cut will happen only in April while a few are still hopeful for February next year.

Compounding the matters, there is a talk of slowdown after most companies missed earnings projections, which has led to the stock market turning wobbly.

Rate cut and impact

For the first time after the pandemic, the Reserve Bank of India increased repo rate from 4% to 4.40% in May 2022. The central bank continued to increase it till February 2023 to 6.50%. Since then, the policy rates have been kept unchanged for the last 18 months, leaving the borrowers to pay hefty interest rates.

However, now high inflation will not let the central bank reduce rates. This means the common man’s struggle will continue as home and auto loans will not come down soon.

This might also impact banks as their retail portfolios will see lower growth. At the same time, the bigger challenge is private capital expenditure will also move slowly. There was high hope that large companies would borrow heavily once the rates were relaxed. Remember, despite strong macroeconomic conditions and a positive environment, large companies are not expanding. The current loan requirements are limited to working capital and not for any project expansions. So the growth of India Inc will remain capped.

Private capex stagnation has been an issue for a long time. There has been a pick up only in a few sectors. But broadly, the growth is still muted. According to a recent report of CareEdge Ratings, private capex stood at Rs 9.4 trillion in FY24, which is slightly lower than Rs 9.5 trillion in FY23. It said there was a 29.5% YoY decline in investment announcements and a 53% YoY fall in project completions in H1 FY25. These indicators, although recovering somewhat in Q2, remain below the three-ye ar quarterly average.

Inflation impact

While economists and analysts are talking about the higher inflation numbers, the real impact of inflation is huge on many people who are under the below poverty line. Higher inflation directly disrupts Thalinomics (a term which was used in India’s Economic Survey to establish a basic diet for the Indians).

A few years back when I used to work for television, I decided to interview a few of the families living in chawls of Girgaon in Mumbai. Inflation was too high then and tomato as well as onion prices had skyrocketed. I asked a person about inflation and he said, "It's been a month since I ate tomatoes”. With deep silence, I swallowed that byte of him. For many of us, it’s just a number but for many, it is the reality they have to face. For many it is their ‘thali’ which is disrupted every now and then as they can’t afford certain ingredients that are even needed for survival. While that's one set of consumers there is also another segment which is looking for their EMI to come down. Both are just waiting for an elusive rate cut.

In my earlier column also, I wrote about the era of low interest rates.

Well, in other big news this week, a leading airline Vistara took its last flight this week. It will never fly again with the same brand as it has merged with Air India.

As usual, I am adding here the top 5 stories of the week, trust you will find them meaningful.

1. Microfinance asset quality may deteriorate this fiscal amid operational challenges
2. RBI deputy governor Patra lists digitalisation gains for Indian banks
3. LIC faces headwinds in H2 on new surrender value norms after solid H1FY25 performance
4. Reducing TReDS threshold to expand timely access to financing options
5. PSBs and PVBs maintain steady expansion in Q2FY25, HDFC adds 241 branches

Happy Reading.

Amol Dethe,

Editor,

ETBFSI.