See upturn in capex cycle, growth momentum to pick up: RBI report


Waning input cost pressures, buoyant corporate sales, and a turn-up in investments in fixed assets suggest the beginning of an upturn in India’s cycle, which could help improve earnings in the coming quarters and speed up “the momentum of growth in the Indian economy”, the (RBI) said in its monthly bulletin for December.

The State of the Economy article in the Bulletin, authored by RBI staff, including Deputy Governor Michael Patra, however, flagged inflation concern. “[Global] Inflation may be slightly down, but it is certainly not out. If anything, it has broadened and become stubborn, especially at its core,” it said.

The report said that if the Monetary Policy Committee’s (MPC’s) projections given in its December meeting hold, then retail inflation would probably fall within the official tolerance band of 2-6 per cent in the next financial year. “Yet, with inflation projected to turn up in the second quarter of next year, there can be no letting down of the guard. The moderation in the size of the policy rate change also provides the space to assess the cumulative impact of tightening undertaken so far on macroeconomic and financial conditions and outlook,” it said.

India’s retail inflation rate unexpectedly decelerated to an 11-month low of 5.88 per cent in November, even as core inflation, which excludes food and fuel prices, inched up to 6.3 per cent from 6.2 per cent in the previous month.

In its December policy review, the MPC raised the repo rate by 35 basis points (bps), taking the cumulative quantum of rate hikes in 2022 to 225 bps. Prior to the December policy, the last three rate hikes were of 50 bps each.

One bps is one-hundredth of a per cent.

“Seeing pressure points in some categories of food, and persistence and generalisation across the core constituent, however, the MPC decided that further withdrawal of accommodation is warranted,” the RBI staff wrote.

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The authors noted that amid expectations of a slowing in the pace of rate hikes globally, foreign portfolio investors (FPIs) remained net buyers in Indian markets for a second month in November. They cited a study that showed domestic markets received more FPI flows than other emerging markets except China and Taiwan last month.

According to the article, foreign exchange reserves worth $564.1 billion as on December 9 accounted for 9.2 months of imports projected for the current financial year. The level of reserves in September 2021 had accounted for close to 15 months of imports.

After falling by around $100 billion from late February to end September, the RBI’s forex reserves have climbed by $31.4 billion.

With bank credit growth having surpassed deposit growth since February, major lenders have increased deposit rates, the RBI staff wrote, pointing out that banks had come up with various ways to attract retail funds. “Banks have come up with various special deposit schemes for different tenors with comparably higher rates than the regular schemes to attract more retail deposits,” the article said.

“The median term deposit rates on fresh retail deposits (card rates) of SCBs increased by 67 bps between May and November 2022. The extent of pass-through to deposit rates has been higher for longer tenor maturities, with the highest being for 1-3 years tenors,” it said.

In the period from May to November 2022, banks raised 1-year median marginal cost of funds-based lending rates by 95 bps in response to 190 bps of rate hikes by the RBI. The magnitude of transmission to weighted average lending rates on fresh and outstanding loans improved to 117 bps and 63 bps, respectively, from May to October, the article said.

State of the economy

  • Lower input cost pressures, buoyant corporate sales, higher investment in fixed assets to boost capex
  • Earnings to improve in coming quarters, push up economic growth
  • Inflation may be within 2-6% tolerance band in FY24
  • Withdrawal of accommodation needed as core inflation pressure persists
  • Banks making efforts to attract more deposits, emphasis on retail schemes


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