RBI's justified opposition to IMF classification of India's exchange rate

 The RBI is the custodian of the country's foreign exchange reserves and manages exchange control. The RBI Act stipulates that the Central Government orders the rate at which the RBI shall buy or sell forex to banks.

The IMF's Article IV review considers a country's current and medium-term outlook and policies. The IMF's report said that the movement suggested "intervention likely exceeded levels necessary to address disorderly market conditions".

In December 2023, the International Monetary Fund (IMF) reclassified India's exchange rate regime from "floating" to "stabilized arrangement" for the period between December 2022 and October 2023.

  The IMF's reclassification was based on the Reserve Bank of India's (RBI) likely interventions. The IMF disagreed with India's perspective, emphasizing the need for a flexible exchange rate. The IMF also called the RBI's currency intervention excessive, while the RBI opposed the IMF's reclassification, calling it "unjustified" mentioning that it has adhered to SDDS(Special Data Dissemination Standards) in a transparent manner while intervening in the forex market for orderly movement of INR vs USD.

The above graph of Trade deficit trend juxtaposed to Indian Rupee vs US Dollar trend over the last 3 years clearly shows that the inverted correlation between these two continue without extended breaks. This belies the IMF argument of Rbi's intervention being excessive.In the year 2022 there was a huge pull out from Indian Stock markets by foreign investors and in 2023 there was a reversal in investing by foreign investors in Indian markets.Despite this sudden higher inflow of US Dollars into the economy, RBI has not allowed volatality to set in the forex markets.

Forex experts will know that Current account deficit to GDP has also shrunk to 1% of GDP in Q2 of FY 24 from 3.8% in the same Q2 of FY23.

The above graph showing the movement of currencies INR vs USD and IDR (Indonesian Rupiah)vs USD over the last one year, buttresses the RBI point that its intervention is limited only to the orderly movement of INR vis a vis US Dollar.

Trade deficit trend hopefully is likely to remain better in FY24-25

 India's goods trade deficit shrank to USD 20.58 billion in November 2023 from USD 22.1 billion in the same month the previous year, less than the USD 23.6 billion difference that the market had predicted.This number is significantly less than Oct 23 Trade deficit of US$31.46 billion which was the highest in the last ten quarters 

Exports decreased by 2.9% to USD 33.9 billion as a result of a number of circumstances, including the geopolitical environment, dangers including rising inflation, the recession in developed economies, the conflict between China and the US and Russia and Ukraine, and the conflict between Israel and Hamas in Gaza. Meanwhile, as imports of gold, oil, and electronics decreased, imports fell 4.4% to USD 54.5 billion. Additionally, from April to November of this fiscal year, imports fell by 8.7% to USD 445.2 billion while exports decreased by 6.5% to USD 278.8 billion.The following figure shows the trend of India's Exports and Imports for the past 5 years since 2018. There was a steep fall in both Imports and Exports during Covid period.

There was a peculiar aspect in Imports this month.Unlike in Oct 23 when Gold imports jumped by 95.4% YOY, this month Silver imports widened by 254.8% YoY!! Has Gold and Silver Imports indicate any correlation with RBI withdrawal of Rs2000 currency! Hoarders may know better!

In the next few months upto March 2024 the outlook looks like:

• Trade deficit is expected to narrow: The trade deficit, which refers to the difference between the value of imports and exports, is likely to narrow in the coming months compared to the same period last year. This is due to several reasons, including:

  • Easing global commodity prices: Prices of key commodities like crude oil and coal have cooled down in recent months, reducing India's import bill.
  • Festive season boost: The upcoming festive season in India typically leads to increased domestic demand for goods, potentially pushing up exports.
  • Government measures: The Indian government has implemented various measures to boost exports and curb non-essential imports, which could further contribute to a narrower trade deficit.

• Month-wise variations: The trade deficit might fluctuate month-on-month due to seasonal factors and specific trade deals. However, the overall trend is expected to be towards narrowing.

• Trade deficit outlook FY 2024-25:

  • Gradual improvement: The trade deficit is expected to gradually improve and narrow throughout FY 2024-25, potentially reaching lower levels compared to the current fiscal year. This improvement is supported by factors like:

    • Continued focus on exports: The government's push towards export-oriented policies and initiatives like Production Linked Incentive (PLI) schemes is likely to bear fruit in the coming year.
    • Domestic manufacturing growth: Increasing domestic manufacturing, particularly in sectors like electronics and pharmaceuticals, could help reduce dependence on imports and boost exports.
    • Geopolitical developments: Depending on how global geopolitical tensions evolve, there could be further opportunities for India to increase its trade with certain countries.

  • Challenges remain: Several challenges could hinder the improvement in the trade balance, such as:

    • Global economic slowdown: A potential global economic slowdown could dampen global demand for Indian exports.
    • Exchange rate fluctuations: Fluctuations in the rupee's exchange rate could impact the competitiveness of Indian exports.
    • Supply chain disruptions: Ongoing global supply chain disruptions could continue to pose challenges for both imports and exports.

  • After General Elections in India in May 24 ,the new incumbent Government is expected to follow the same progressive Trade policies.

  Overall, the outlook for India's trade balance is cautiously optimistic for the next four months and FY 2024-25. However, it's important to remember that the situation remains fluid and subject to various external and internal factors.

  
  
  

  It's also important to note that these are just forecasts, and the actual trade balance figures may differ. It's advisable to stay updated on the latest developments and economic reports for a more precise understanding of the evolving situation as Global Oil Price can spoil the forecast of improvement in Trade deficit!

CPInflation and the domestic Oil price magic!

 India's CPI Inflation has been steadily declining after RBI raised the policy Repo rates by 250 bps over a period of about 18 months.CPI for Nov 23 has come in at 5.55% as against the RBI's upper band limit of 6%. CPI in Oct 23 was lower at 4.87%.

1. Food prices: According to the official press release from the Ministry of Statistics and Programme Implementation, the rise in food prices was the main driver of the overall inflation increase. Specifically, vegetables, fruits, and pulses saw notable price increases.

2. Global factors: The ongoing war in Ukraine and global supply chain disruptions continue to put upward pressure on prices for various commodities, including food and energy. This can indirectly affect India's inflation even if domestic oil prices remain unchanged.

3. Base effects: The November 2022 CPI figure was relatively low at 4.9%. This means that the year-on-year comparison for November 2023 naturally appears higher due to the lower base from the previous year.

RBI Repo rate hikes have really kept the CPI rate at a leash.

But it should also be said that because the Retail prices of Oil- Diesel and Petrol have been held without a change for more than 600 days running now, it has helped in taming the domestic inflation by shutting off import of inflation through Crude oil price fluctuations.

Going forward RBI should keep this in mind while reviewing its monetary policy stance since Oil prices fluctuations have not rocked the inflation boat!

RBI has Arjun's eye and Arjun's quiver !

 RBI Governor Shri.Shaktikantadas emphatically enunciated RBI's policy for containing inflation in the month of Nov22 by calling its focus as "Arjun's eye"!

In Mahabharata Arjun is eulogised for his single minded focus on hitting the targets with unwavering skill.

RBI has succeeded in its mission in the last one year largely, by reducing the CPI inflation keeping it within the band of 2% to 6% for the last few months with occasional jump beyond the upper band of 6% induced by food inflation.

In the recent policy press meet RBI Governor went one step ahead and mentioned that he has Arjun's quiver with all its arrows and weapons to tackle the inflation if it rears its head. He specifically mentioned that OMO being one such weapon is still in Arjun's quiver. He hastened to add at the end of the press conference that the Arjun's analogy is only meant to say that all kinds of weapons to kill the inflation are at his command and not to equate himself with the larger than life hero  Arjun of Mahabharatha.

Leaving aside Arjun's eye and quiver, RBI's recent policy is pedantic  but keen on keeping the ship steady with monetary policy in sync with the Govt's Fiscal policy. RBI is doing a tight rope walking conscious of not doing excessive liquidity tightening which can hamper growth when General elections are just round the corner and also not  loosening its grip on liquidity which can bump up the inflation.

Since the elephant in the room is General Elections due next May, Govt. will have to work in tandem in showing fiscal rectitude by not overshooting its Fiscal deficit target of 5.9% of GDP this year since higher GDP growth itself can generate heat in the economy pushing up the inflation.Added to that will be Govt.spending on Capex & others and other Election spending by parties splurging on liquidity and RBI is mindful of these monetary quagmires.

RBI will be presenting two more Monetary policy updates- in Feb 24 and April 24 before the General elections and will do everything in its ability to rein in inflation if it reaches uncomfortable levels.

Fortunately all PSU banks are in ship shape with low NPAs and sufficient provisioning which gives large elbowroom for the Central bank to manage the liquidity in the system and thereby keeping inflation in a leash. The factor beyond RBI or GOI's control is Oil and other Commodity prices which can rock the boat.However RBI fortunately has  Arjun's quiver to quell the inflation!

Q2 FY24 GDP growth at 7.6% is phenomenal but...

 Govt has released the official NSO estimates for Q2 FY24 GDP growth rate at 7.6% which is a tad lower than 7.8% GDP growth in Q1 Fy24.

This figure is stupendous but what are the pin pricks in sustaining this high growth trajectory in H2.

1)Agricultural GDP growth has faltered to 1.5% due to truant monsoon rains;

2)Personal final consumption expenditure grew at 3.1% as against 6% in the Q1.

3)Government Investments and Government Consumption have picked up due to higher fiscal deficits budgeted for the year;

4)despite higher Personal loans, Vehicle loans etc given by NBFCs and Banks ,why Personal Consumption is languishing- Is it because of higher inflation due to food &fuel?Are the new loans taken to payout old loans leading to recycling of loans?

5)Only Urban Consumption expenditure is showing some significant traction but Rural consumption is still  tepid and low.

6)Unemployment rate is holding steady but still not falling significantly. Moreover the Wage earnings over the years have not grown significantly for  those employed at lower levels and therefore, this has not enabled them to generate higher disposable and discretionary incomes.

The above questions point to a situation where the GDP growth is on high steroids of Government expenditure fuelled by high Fiscal deficit budgeted.

If Governments &PSUs spending on Capex falter in the years to come, the GDP growth may also fall in tandem.

In nutshell, the GDP growth is largely confined to Urban segments  and sectors and the people who are dependant on it , thereby sidestepping rural India's huge population.

Courtesy: Crisil Research

IMHO, the above crude analysis may be wrong and if proven wrong in the medium term when the Fiscal deficit levels are brought down, I will be definitely happy.