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Mint
2 hours ago
- Business
- Mint
The Reserve Bank's leap of faith: A big rate cut is very hard to justify
It's a study in contrasts. About a month to the day, the US Federal Reserve left interest rates unchanged in a wait-and-watch response to the uncertainty about how President Donald Trump's tariffs will raise inflation and/or slow growth, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) saw no merit in waiting for the fog to lift. It cut rates for the third time in a row and by a larger-than-expected 50 basis points to 5.5%. Not content with that, it went in for what many might term an 'overkill,' lowering the cash reserve ratio (CRR), or the amount of bank deposits impounded with RBI, by 100 basis points, which will over the course of this year release an additional ₹2.5 trillion of liquidity into a system already flush with funds. RBI's leap of faith in support of growth, when many would argue that growth is doing quite well by its own projections, is hard to justify. At a time when it is impossible to know for sure whether the price or growth effects of US tariffs will dominate, front-loading action could well be a two-edged sword. The belief (mistaken?) that lower interest rates and surplus liquidity alone will raise growth without reigniting inflation beats logic. And past experience too. Also Read: RBI's policy review: Why this time is truly different So, what has changed since the last meeting in April 2025 that could possibly justify the sea-change to a looser-than-expected (warranted?) monetary policy? The governor's argument is that growth needs support, hence the need to front-load action. Except that the data does not support that view. On the contrary, not only has growth done better than expected, with fourth-quarter (January-March 2025) growth at 7.4% better than RBI's December projection of 7.2%, but the growth projection for 2025-26 has also been left unchanged at 6.5%. The dilemma for the MPC was how it should frame policy when growth is faring better than expected and also inflation (which retail numbers for April suggest is under control). But there is a cloud hanging over both. Sure, the India Meteorological Department's prediction of a good monsoon suggests agriculture will do well. But summer months invariably see an uptick in food inflation. Moreover, it is the temporal and spatial distribution of the rains that affect food prices, not overall precipitation. We have already seen prices of onion and tomato—two of the treacherous TOP (tomato, onion and potato) sub-group that plays havoc with food inflation—edge up. Core inflation (excluding food and fuel) is also up at 4.2%, the highest since September 2023. Also Read: Ajit Ranade: RBI's increasing fiscal support deserves a closer look Meanwhile, the impediments to growth are mainly external—tariff induced—over which RBI has no control. In such a scenario, it might have been better had RBI borrowed one of the principal precepts of bioethics,Primum non nocere, a Latin phrase that means 'first do no harm.' This fundamental principle in healthcare (not out of place when covid is again among us) basically says: 'Given an existing problem, it may be better not to do something, or even to do nothing, than to risk causing more harm than good.' It reminds healthcare personnel to consider the possible harm any intervention might do. And is invoked when debating the use of an intervention that carries an obvious risk of harm but a less certain chance of benefit. Also Read: RBI's ₹2.7 trillion: Many benefits arise from one big beautiful surplus Remember, US gross domestic product (GDP) growth contracted 0.2% during the January-March quarter, even as our GDP grew 7.4%. Despite this hit to US growth and constant bluster from President Trump, who has made his displeasure with Federal Reserve chair Jerome Powell known in no uncertain terms, the Fed opted to bide its time. Wisely so. Powell's statement after the last meeting of the rate-setting Federal Open Markets Committee sets out the logic very clearly. 'We may find ourselves in the challenging scenario in which our dual mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal and the potentially different time horizons over which those respective gaps would be anticipated to close." The MPC resolution does not offer any such reasoning. In the absence of a convincing argument, it is tempting to attribute Friday's policy-rate change to the panel's changed composition. The MPC's newly-inducted deputy governor in charge of monetary policy, unlike her career-central-banker predecessor, is perhaps not an inflation hawk. But then, that would go against the veryraison d'être of entrusting rate decision-making to a committee rather than an individual. Also Read: Mint Quick Edit | An inflation dip enlarges RBI's policy space 'Policy levers," said Governor Sanjay Malhotra, 'are needed to step up the growth momentum." The 'changed growth-inflation dynamic calls for not only continuing with the policy easing but also front-loading the rate cuts to support growth." A bit of a hard sell, given that we claim to be among the world's fastest-growing major economies, with 2025-26 growth projected at 6.5%. Sure, growth remains lower than our aspirations amid a challenging global environment and heightened uncertainty. But aspirations are not to be confused with potential. Wise central banks know the difference. As for uncertainty, in the words of former Fed chair Alan Greenspan, 'Uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape." All the more reason then not to jump the gun, but to cross the river by feeling the stones. There is no great sanctity in timing rate decisions with MPC meetings. For central banks, the motto must always be, 'Better safe than sorry.' The author is a senior journalist and a former central banker.
Mint
26-05-2025
- Business
- Mint
RBI's ₹2.7 trillion: Many benefits arise from one big beautiful surplus
On Friday last, the Reserve Bank of India (RBI) announced its decision to transfer a record surplus of nearly ₹2.7 trillion for 2024-25 to the Indian government's coffers. The sum of ₹2,68,590.07 crore transferred is loosely referred to as the central bank's 'annual dividend,' but since it is not a commerce entity, this is actually the 'surplus' of its income over expenditure. It is 27% higher than the previous year's figure, despite an enlarged contingency risk buffer (CRB), as stipulated by the revised Economic Capital Framework (ECF) approved by RBI's Central Board. As against a CRB of 5.5-6.5% laid down by a panel led by former governor Bimal Jalan half a decade ago, the range has been widened to 4.5-7.5% of RBI's balance sheet. Rightly so. Also Read: Ajit Ranade: RBI's increasing fiscal support deserves a closer look That RBI was in the process of reviewing the ECF was known, but few may have expected the upper end to be raised. The CRB comprises three sub-buffers; while the norms were kept steady for credit risk and operational risk, the central bank's buffer for monetary and financial risk was reset at 3.5-6.5% from 4.5%-5.5% earlier. This is entirely in keeping with the principles of prudent central banking. The CRB, as the name suggests, is meant to take care of contingencies. So, from 2018-19 to 2021-22, a period that included an economic slowdown even before the pandemic disruption, RBI maintained its CRB at the 5.5% lower bound as part of its effort to support India's economy. It was upped to 6% for 2022-23 and further to 6.5% for 2023-24. And now, based on its assessment of 'macroeconomic conditions and other factors affecting the balance sheet of RBI," it has been raised to 7.5% for 2024-25. Also Read: Dividend from public sector cos may swell govt coffers by over ₹80,000 cr in FY26, all-time high A detailed analysis of RBI's income, expenditure and sources of surplus will have to await publication of its Annual Report for 2024-25. But it is fair to surmise that, as in the past, the bulk of its earnings last year came from its foreign exchange transactions in support of the rupee. The balance is likely to be from earnings on its holdings of foreign and domestic securities; in the latter case, as a result of open market operations to infuse liquidity into the banking system, which RBI did by buying bonds in cash from banks. The sale of dollars to prop the rupee's rate of exchange turned a 'profit' for it since the dollars sold during the year were acquired earlier at a much lower price. Some back-of-the-envelope math suggests that every dollar sold may have fetched RBI close to ₹6. Given the enlarged scale of its forex operations last fiscal year, its gains would have been substantial. Also Read: Mint Explainer: How RBI's new digital lending rules will impact lenders and borrowers But there is a flip side to this. Given that RBI payouts of such magnitude typically spring from heavy intervention on the rupee's behalf, there's a risk that the other side of the trade-off could get short shrift; a rupee that's too strong dulls the pricing edge of our exports, as the landed prices of Indian goods and services are higher overseas than they'd otherwise be. How best to manage the rupee, though, is a complex question involving various macro variables, so this debate is unlikely to be settled easily. What's doubtless is that the surplus transfer could help the Centre keep its fiscal deficit for 2025-26 within its 4.4%-of-GDP target in an economic scenario where slower growth could hurt its revenues. Both Mint Street and North Block have reason to be pleased with this mega surplus. With multiple benefits arising from it, it's good for the Indian economy.
Mint
25-05-2025
- Business
- Mint
Time to re-imagine Indian manufacturing from the ground up
China's President Xi Jinping has stepped up calls for greater self-reliance in the country's manufacturing sector, reinforcing a strategy that has long unsettled its global trade partners. His latest remarks came less than a week after Beijing and Washington agreed to a 90-day pause in their bilateral trade conflict. The message is unmistakably forward-looking: economic resilience, in Beijing's calculus, will come not from the Chinese economy's openness, but from fortified sovereignty. India must take heed—not to mimic China's model, but to recognize the scale and seriousness with which Beijing is re-setting its industrial ambitions. While much attention has focused on traditional sectors, the scope of China's strategic planning stretches far beyond. Also Read: How a manufacturing boom could help India close the gender gap Programmes such as its Three-Body Computing Constellation, which seeks to process data in space rather than rely exclusively on ground-based infrastructure, and its New Infrastructure initiative, which aims to integrate its space, computing and artificial intelligence (AI) ecosystems into a common architecture, are designed to position China as a nation where manufacturing, data and national capability converge. In this context, India's manufacturing strategy demands nothing less than an overhaul. There is now a clear recognition among global producers that excessive dependence on China is both economically and geopolitically risky. This strategic recalibration has opened a rare window for India. Yet, intent must not be mistaken for preparedness. India's manufacturing sector continues to punch below its potential. Its contribution to GDP has remained stagnant for long, despite repeated policy pronouncements. Structural constraints—cumbersome regulations, poor contract enforcement, fragmented infrastructure and bureaucratic unpredictability—continue to erode investor confidence. Policy instruments like our production-linked incentive (PLI) schemes represent a promising shift in direction, but their results have been patchy. For India to serve as a genuine alternative to China, it must build not only capacity, but also credibility and coherence. The need for stronger manufacturing goes beyond economics. In the emerging global order, manufacturing is a proxy for national resilience and strategic autonomy. India cannot afford to see industrial policy as a narrow economic tool. It must be reframed as a national strategy. Also Read: Ajit Ranade: India must diversify its exports of manufactured goods The challenge is compounded by a fast shifting manufacturing frontier. Advanced manufacturing today is inseparable from frontier technologies—robotics, quantum materials, cyber-physical systems and AI. Nations that fail to integrate these capabilities into their industrial base will find themselves stuck in low-value assembly roles, increasingly expendable in the global value chain. India risks exactly this fate, unless it invests in research and development institutions, translational science and sovereign technology ecosystems that can be scaled up at will. Tariff concessions and free trade agreements, while necessary, cannot compensate for the absence of deep industrial innovation. India's democratic structure makes its path more complex but potentially more durable as well. The country can't mobilize capital and labour through central diktat. We must take a harder route, but one with greater long-term legitimacy and resilience. If we pursue a clear strategy, we can offer the world a unique proposition: a trusted, rules-based and pluralistic manufacturing ecosystem that is open, scalable and anchored in law. Also Read: India can leap from cost competitiveness to innovation-led manufacturing For this to materialize, however, India must abandon incrementalism. Manufacturing must be treated not as just another growth problem to be solved, but as a core aspect of our economic architecture. It is through manufacturing that productivity is unlocked, technological depth is built and strategic heft is earned. While emerging technologies will inevitably displace certain categories of labour, they also offer us an opportunity to re-imagine industrial employment altogether. The future of jobs will not lie in resisting automation, but in preparing the workforce to thrive alongside it. India must therefore invest in building a tech-enabled labour base, redesign vocational training for hybrid skill sets and create adaptive ecosystems where services, innovation and advanced manufacturing co-evolve. Also Read: Madan Sabnavis: Can India's economy count on manufacturing as an engine of growth? Global trade winds may temporarily shift in India's favour, but the ballast must come from within—through the strategic construction of systems that reward efficiency, absorb disruption and scale quality production without surrendering the sector's employment imperative. Historical precedent reinforces the argument. The great powers of the past two centuries—from Industrial-Age Britain and post-war America to contemporary China—built their global influence on a bedrock of industrial strength. This isn't an anachronistic view. Even in this digital age, the ability to design, produce and distribute physical goods at scale remains central to economic progress. Software may be embedding itself in everything, but cannot replace hardware in times of geopolitical rupture. This moment is not just about factory floors. It is about the kind of nation India wants to become. It is a test of whether the country can lead with systems, not slogans. A well-formulated manufacturing strategy would be a statement of intent to shape the future, rather than be shaped by it. The author is a corporate advisor and author of 'Family and Dhanda'
