What's in store for Indian financial markets in FY 2023?

In early April, when the Monetary Policy Committee (MPC) met, after reviewing the current and evolving macroeconomic situation, it decided to keep benchmark interest rates unchanged. It also assured that it would remain accommodative as long as inflation remained within its target.

Then, barely a month later, in early May, the MPC announced an increase in key interest rates, for the first time since August 2018. And, it was the sharpest increase in 11 years!

In April, the RBI recognized the escalation in geopolitical conflict and accompanying sanctions were causing steep and substantial rises commodity prices, across the board, amidst heightened volatility.Commodity trade was being impacted quite adversely and crude oil prices spiked to a 14-year high in early March; despite some correction, they remain volatile at elevated levels. Further, there were renewed supply chain pressures, which were expected to ease once the pandemic abated, and financial markets were exhibiting increased volatility.

In a nutshell, the global financial environment was precarious.

Effectively, in April itself, the global environment prescribed a domestic rate hike. But still the RBI was willing to wait and watch. While that sounds incongruous, it was largely because the domestic recovery seemed strong and the RBI may not have wanted to stifle nascent growth impulses.

India’s real GDP had grown at 8.9% to cross pre-pandemic (2019-20) levels by 1.8% and high frequency indicators, such as urban demand, travel, passenger vehicle sales, imports of capital goods and merchandise goods exhibited signs of recovery. The manufacturing and services PMIs remained in expansion zone in March and even agriculture supported the turnaround with food grain production touching a new record in 2021-22, as both kharif and rabi output crossed the final estimates for 2020-21 as well as the targets set for 2021-22. The third wave of Covid19 was ebbing fast .

In fact, the Indian economy seemed to be returning to robust health.

The main concern was inflation. In both January and February 2022, headline CPI had breached the upper tolerance threshold, particularly on account of food inflation. Domestic food prices were increasing in sympathy with international prices, despite the record foodgrains production and buffer stock levels and elevated global price pressures in key food items due to global supply shortages were imparting high uncertainty to the food price outlook.

Further, international crude oil prices also remained volatile and elevated due to the uncertainty in global supplies. All these factors warranted continuous monitoring and pro-active supply management.

At the same time interest rates, which are the flipside of the inflation, were rising globally. During the pandemic, to cope with the economic and health crisis, central banks across the world followed expansionary policies. A reversal of this easing was definite; the only questions were ‘when and in what gradient’.

Now, central banks in several countries are tightening borrowing costs in an effort to cushion businesses and consumers from inflation, especially at a time when economies are recovering from the pandemic and the Russia-Ukraine conflict is disrupting supply chains. Even the US Federal reserve raised its policy rate by 25bp for the first time in March 2022 after a gap of more than three three years and followed by another 50bp rate increase in early May— its highest increase in more than 20 years.

Naturally, concerns about rising global inflation and interest rates prompted the RBI to raise its rates too.But what could rising inflation and interest rates mean for India’s growth and its financial markets.

Typically, such a situation at the global levelcould hamper economic growth and even push economies into recession. For India, monetary tightening by the US Fed translated into an outflow of portfolio investment. Until 16th May 2022, foreign portfolio investors had pulled out a whopping USD 21.2 billion from India. Alongside the higher import bill, on account or rising commodity and crude prices, this outflow put immense pressure on the Indian rupee and forex reserves.

While evaporating domestic liquidity was the first round impacted of the rate hikes, the impact on business growth and infrastructure development will be visible in the second round. The question of ‘how much’ the impact will be, will depend on ‘how long’ the geo-political uncertainty continues to disrupt supply chains.

If the conflict get resolved before the real economy, i.e. large and small businesses, face adversities in their fund flows, the financial markets could recover within a quarter or two, at most. However, if international supply constraints persist and fund flows remain volatile, it could lead to a longer term tightening inIndia’s financial conditions, reflected in further rising of interest rates, bank lending rates, weak capital flows and a depreciating rupee.

As the RBI governor explained, several storms have hit together and India’s monetary policy response should be seen as an important step to steady the ship. On the bright side, the Indian economy has been fortunate to have sterling captains who have, in the past, brought this ship to safety in the midst of raging storms. While there is never a perfect playbook for any financialor geopolitical incident, it’s comforting to know that the RBI is as vigilant as always; it actually raised domestic interest rates a few hours before the mighty US Fed called in its second rate hike. It’s safe to say that it will follow a conservative but not necessarily reactionary approach to protect domestic financial markets from international backlash in FY23.

Crafting an Equivalent of Ayushman Bharat for the Health of Small Enterprises

The Ayushman Bharat - Pradhan Mantri Jan ArogyaYojana (PM-JAY) is an incredible initiative. It is the largest of its kind, the world over, and perhaps one of the most ambitious, life-changing schemes for Indians in the domain of healthcare.

Similarly, to have a truly long term Ayushman Bharat in the truest sense of the term, it becomes imperative to look at the financial health of the enterprise ecosystem of Bharat. Making it strong, robust, and sustainable is akin to insuring the survival, health, and growth of millions of enterprises at the grass-root level and thereby, the financial health of micro-entrepreneurs.

There are numerous ailments that afflict micro-enterprises. Most predominant among these are financial challenges of indebtedness and lack of financial expertise, lack of access to capital at reasonable rates of interest, and absence of credit history within the formal financial sector. These are issues that are best addressed by micro-finance institutions.

The RBI describes microfinance as a form of financial service which provides small loans and other financial services to poor and low-income households. It is an economic tool designed to promote financial inclusion which enables the poor and low-income households to come out of poverty, increase their income levels and improve overall living standards. Supporting micro-finance institutions with adequate capital and policy facilitation can go a long way towards mitigating the financial challenges of the micro-enterprise sector.

Additionally, attention will need to be paid to other crucial functions, like access to quality raw materials at reasonable rates and marketing goods, as these could become bottlenecks in their progress. According to the Seventh Five Year Plan, micro and small enterprises face issues of technological obsolescence, inadequate and irregular supply of raw materials, lack of organized market channels, imperfect knowledge of market conditions, unorganized nature of operations, inadequate availability of credit facility, the constraint of infrastructure facilities including power, and deficient managerial and technical skills.

Typically, micro-enterprises suffer from combinations of these ailments, and curing one or two in isolation will not enable them to achieve good health and progress. They require holistic diagnosis and regular mentoring until they can be certified as healthy and on the path to sustainable growth.

To draw these business units out of the morass, all stakeholders will have to commit unprecedented efforts. The center and states will have to digitize and sync their records and schemes; the public and private sector financiers and nodal mentoring agencies will have to work shoulder to shoulder to ensure that the necessary infrastructure – be it financial, physical, human resources, logistical or digital, is in place. And last, but not the least, government policies support pragmatic progress and facilitate the mission.

The Government and financial institutions have made numerous efforts over the years, to facilitate this segment. These have been momentous in their own way. However, a mission of the size and scale of the Ayushman Bharat Yojana is required to deliver effective results at a nationwide level.

In recent times, India has demonstrated the ability to successfully achieve colossal country-wide missions, such as the Covid19 vaccination drive and before it, the Aadhaar initiative. Its current efforts towards achieving the targets of the Ayushman Bharat are laudable too. There is no doubt that a visionary endeavor to ensure the health of level micro-level enterprises could have multifarious benefits. Beyond ensuring the well-being of people, it will contribute to building a new India by enhancing productivity, reducing financial hardship, creating jobs, and boosting activity in the economy as a whole, as backward and forward linked sectors witness increased activity too.