A durable recovery is expected in private investment as the signs of a pickup in consumption-driven cycle are already visible on the back of the government’s income tax relief and the repo rate cut by the Reserve Bank of India (RBI), Union Finance Minister Nirmala Sitharaman said after the post-Budget RBI Board meeting on Saturday. RBI Governor Sanjay Malhotra echoed the Finance Minister’s sentiment by stating that the repo rate cut delivered by the central bank should boost consumption.
Many in the private sector are already looking at reviewing capacity utilisation, as per anecdotal inputs, Sitharaman said. “The orders for fast moving consumer goods (FMCG) for the period April-June are already getting booked and the industry is clearly seeing the signs of a possible recovery of consumption. And, as a result, many of them are looking at reviewing their capacity utilisation itself. From these limited anecdotal inputs that you’re getting, you can safely see that the triggers for a consumption-driven cycle are very clearly being felt by those who have to make the investment decisions. So, I see it as a positive sign with yesterday’s (Friday’s) decision of the RBI (of a repo rate cut), I am sure together things can move in alignment and in the required traction that we need in this course,” she said.
Referring to the recent fiscal and monetary policy measures, Sitharaman said whether it is growth or inflation, both the policies are like “two tyres of a car” and by working together and in coordination, the economy will gain.
“Whether it’s inflation or growth, particularly plugs for growth, it is appropriate for the RBI and the government to have coordination on this. Neither of them encroaches on each other’s territory, I don’t think that has existed in the last 10 years and I don’t see that existing even in the future. There has been good coordination between the RBI and the government…in the coming days also, the RBI and the government will work in a well-coordinated fashion keeping our growth impulses in mind,” Sitharaman said.
Inflation, rupee depreciation
Malhotra said the RBI is alert to all pressures on inflation and the impact of rupee depreciation on imported inflation. “As per our calculations and estimates, a 5 per cent depreciation in the Indian rupee leads to about 30-35 basis points of inflation. That has been kept in mind (in RBI’s February monetary policy). We’ll be watchful on that account,” he said.
The RBI Governor said that most of the depreciation in the rupee is driven by the “global uncertainties, and the Trump-related tariff announcements”. “Hopefully, that should settle down and that will help us in the downward movement of inflation,” he said.
The Indian rupee has hit record lows over the last few days going past the level of 87 against the dollar due to foreign fund outflows and a stronger US dollar. Globally, there have also been concerns around an escalating tariff war between major economies, with the US, under its new President Donald Trump, detailing its intent to impose higher tariffs on three of its largest trading partners — Canada, Mexico and China. While Canada and Mexico have got a month’s breather, China has retaliated with its own set of tariff measures against the US on February 4.
Story continues below this ad
Sitharaman pointed out that India’s move to rejig its import tariffs on key items in the Budget was not a “knee-jerk response” to the recent tariff measures undertaken by Trump, adding that the rationalisation of customs duties has been in the works since the last two years. “These kinds of steps have been happening since the last two years, so whatever steps were announced in the Budget in terms of BCD (basic customs duty), its regulations and rationalising, is not in any knee-jerk fashion to any development globally. This is an ongoing process. We want to make India a lot more investment friendly, trade friendly and at the same time balance it with Atmanirbhar Bharat,” she said.
However, the government will provide tariff protection to certain industries, especially MSMEs in the manufacturing sector. She also clarified that protection through anti-dumping duties will be limited to exceptional situations. “…so that the protection does not become a perpetual protection,” she said.
Liquidity measures
When asked about the absence of deep liquidity infusion measures in the latest monetary policy, Malhotra listed out several steps taken by the RBI to support transient as well as durable liquidity. He further said going forward, the RBI will be “very very watchful, alert, and very nimble and agile in whatever are the requirements of the banking system to provide liquidity, both transient, overnight, as well as more durable liquidity.”
The deficit in the banking system liquidity had widened to over Rs 3 lakh crore last month. The tightness in the liquidity was due to the RBI’s continued dollar sales to curb rupee depreciation, tax outflows, and muted government spending. In order to address this, the RBI on January 27 announced measures to boost liquidity through USD/INR buy/sell swaps, open market operation (OMO) purchase auctions and a 56-day variable rate repo (VRR) auction.
Story continues below this ad
“We have a number of instruments at our hands to control and manage liquidity. We will use them, we have the OMO, buy/sell swaps of forex, we have various other instruments, we have LAF, VRR, and we are using all of these measures to provide sufficient liquidity, so we need not be worried on that account,” Malhotra added.