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Informist, Tuesday, Feb. 18, 2025

 

MUMBAI – Notwithstanding the recent slowdown, the Indian economy can grow at 6.5-7.0% in 2025-26 (Apr-Mar) if liquidity conditions ease and the government meets its revised fiscal estimates, Neelkanth Mishra, chief economist at Axis Bank, said at the launch of the 2024 Burgundy Private Hurun India 500 report Tuesday.

 

"If the liquidity conditions were to normalise fast, say over the next three months, and government fiscal targets are met on the revised estimates of central government, I am reasonably sure that by FY26, even if we don't average out 7%, after the first quarter or so, the run rate will be of that magnitude," Mishra, who is a part-time member of the Prime Minister's Economic Advisory Council, said.

 

"So if liquidity pressures were provided as and when needed, as was promised by RBI Governor Sanjay Malhotra in the February Monetary Policy Committee media conference, and it happens fast enough then the 7% target is possible," Mishra said. "Only uncertainty now is how much time it will take for that to happen," he added, highlighting that the cost of funds in the Indian financial system is very high.

 

The economic survey for FY25 had forecasted India's real GDP growth for the next financial year at 6.8%. The Union Budget targeted a fiscal deficit of 4.4% of GDP for FY26, and lowered the target for FY25 by 10 basis points to 4.8% of GDP.

 

Mishra also said that out of all the tools that the Reserve Bank of India can use to increase liquidity in the system, open market operations would be the best option. On Monday, the net liquidity injected by the RBI – a proxy for the systemic liquidity deficit – was INR 1.81 trillion. The system has been in deficit since mid-December. Liquidity has been under strain because of heavy dollar sales by the RBI looking to support a depreciating rupee in the face of global market volatility. Over the last two months, the RBI has deployed various tools including dollar/rupee buy/sell swaps, open market gilt purchases, and a cash reserve ratio cut to replenish the rupee liquidity drained through its foreign exchange operations.

 

"Starting July, RBI started to ease liquidity. Overnight liquidity was in surplus, then the CRR rate was cut. The problem has been that the INR 5 trillion of FX sales that they had to do, has pushed durable liquidity into deficit. So, if you are selling dollars and buying back rupees, then you have to find a way to get the rupees back into this. Which is why the open market operations should be the best," he said.

 

The RBI has already bought gilts worth nearly INR 1 trillion through open market operations in FY25, with another INR 400-billion auction scheduled Thursday.  End

 

Reported by Kshipra Petkar

Edited by Ashish Shirke

 

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