The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to take a pause in April amid continuing rate hikes by systemically important central banks and domestic inflation concerns. That was a bit of a surprise as many were expecting one more rate hike before the pause. Mint Road’s moves are influenced by a mix of domestic and global factors, with the former playing a decisive role.

To be sure, after the collapse of Silicon Valley Bank (SVB), the risks to the United States (US) banking sector have risen and financial conditions have tightened faster than dictated by the US Federal Reserve’s actions. This thawed expectations of further rate hikes by the Fed and offered a breather to emerging markets, including India.

The MPC’s non-action was primarily dictated by an expectation of inflation softening to 5.2% in fiscal 2024. By the way, the RBI continues with its stance of withdrawal of accommodation, which could be interpreted as a comma in the monetary policy tightening cycle and not a full stop. We believe that unless inflation surprises on the upside, the India’s rate cycle has peaked.

Another encouraging news is the India Meteorological Department’s (IMD) prognosis, which sees normal monsoons and lowered risk from El Niño risks this year. Despite these developments, risks to our outlook have not subsided. The International Monetary Fund, in its recent World Economic Outlook, reiterated, ‘the turbulence continues to build, and the situation remains quite fragile’.

The slowing of global growth and its rotation away from the US and Europe towards China is net negative for us. S&P Global expects global growth to slow to 2.7% in 2023 from 3.4% last year. Gross domestic product (GDP) growth in the US and Europe is projected to slow to 0.7% and 0.3%, respectively, while China’s growth lifts to 5.5% on removal of Covid-19 restrictions. Since India’s exports to US + Europe are over six times than to China, our overall exports will get adversely impacted, despite some cushion from service exports.

Services exports, as these have been very resilient, are consistently increasing their share in exports, and have diversified with rising contribution from professional and management consulting. Additionally, India will have to brace for likely financial sector stress in advanced countries due to sharp interest rate hikes amid high debt and slowing incomes.

In such a scenario, falling current account deficit (CAD) is comforting for the authorities. We expect CAD to narrow to 2% of GDP this fiscal from an estimated 2.5% last fiscal. But with increased possibility of global financial turbulence, its financing could be a challenge.