The big talk for the markets in 2024 had been the elections. Despite the outcome not being entirely as expected, the markets have been cheerful. After all, continuity of the NDA government, a majority of the ministries and the leadership itself ensure political stability.
More importantly, with several big moves set in motion over the last decade, fiscal policy is expected to continue on the lines of infrastructure development, thrust on manufacturing and reforms of sectors like defence, power and public sector enterprises.
And while fiscal policy for India seems to be fairly predictable for the future, the other economic powerhouse - monetary policy seems to be a bit of an unknown at this point.
What’s Happening?
Earlier this month, the RBI kept rates interest rates steady. With inflation under control, and growth steady, the RBI seems to have little to worry about.
CPI for April eased to an 11-month low, and the GDP for FY24 beat estimates. Why would you even need a rate cut in this scenario?
Why Should You Care?
With the elections behind, the next big trigger for the markets seems to be in the form of a rate cut.
Several market participants believe fiscal policy could take a bit of a populist tilt given how the election outcome has been.
If this does pan out, there could be some risk to economic growth expectations, and hence corporate earnings, and hence appreciation in stocks.
What’s Happening Around the World?
Because the last two years have seen a rather synchronised movement in inflation and interest rates across the globe, it becomes useful to take a stock of what other central banks are up to:
The Fed’s Status Quo - The US Fed has indicated that it will see just one rate cut this year- which is a downward revision from earlier expectations. The economy has been showing immense resilience, despite rates being at a two-decade high, which shows that inflation doesn’t really necessitate a cut anyway
Europe’s Cut - Across the ocean, the European Central Bank (ECB) however acted differently. The central bank cut rates by 0.25% despite itself forecasting inflation at above its targeted 2% for this year as well as next year. The lack of confidence was also reflective in the fact that ECB didn’t commit to any particular path, saying decisions will be made as meetings happen
And Some Other Cuts Too - The Swiss National Bank (SNB) was the first large economy to cut rates. With an inflation of just 1.2% for February, the central bank was prompt to cut rates. Canada too had cut rates, becoming the first country from the G7 to have made the move.
When Can Rates Get Cut?
With divergence appearing in global monetary decisions, there seems to be increased focus on domestic macros. The RBI also specified that India’s decisions will not be hinged on to what the Fed does.
Realistically, the RBI could cut rates in the following scenarios:
Risk to inflation reduces if there is a good monsoon, and/or
Cracks seem to appear in potential growth due to base, policy or anything else
What About the Stock Markets?
The combination of controlled inflation and strong growth is already a good sign - and the market seems to be in that happy state.
When monetary policy was regressive between 2021 and 2023, an aggressive and expansionary fiscal policy saved the day for India, boosting the economy and keeping investors happy.
If the tide were to turn in the future and fiscal policy aggression were to moderate, monetary policy can come in handy to support growth. Given the peak that rates are at, there would be plenty room on monetary policy to boost the economy.
This situation keeps India’s and the stock market’s long-term upward trajectory intact. While the markets can take a breather in the near-term, the fiscal-monetary policy balance for India seems to be in a good spot!
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