RBI’s Pause on Repo Rate Hike

• The RBI has decided to not increase the repo rate amid continuing hikes by important central banks such as the US Federal Reserve (Fed) and European Central Bank (ECB), and domestic inflation concerns. However, if incoming data point to rising inflation risks, this decision could prove to be only a pause in the rate hiking cycle.

The RBI’s decision to pause rate hikes

• The RBI feels that money market rates have effectively risen more than the 250-basis-point yank in the repo rate since May 2022, and hence it decided to pause and assess the impact of rate hikes.
• The key reason behind the MPC decision is the expectation of a decline in inflation to 5.2% in the current fiscal, driven by a healthy rabi crop, normal monsoon, moderating international commodity prices, and the impact of rate hikes.
• The RBI acknowledges the upside risks and stated its readiness to fight any unexpected rise in inflation.

Impact on GDP Growth

• The RBI expects GDP growth to slow to 6% from 7% this fiscal as slowing global growth, domestic interest rates, and messy geopolitics bite.
• Slowing global growth will be a net negative for India’s exports, and the growing dependence on commodity exports makes India more vulnerable to global growth volatility.
• Fiscal 2024 will, therefore, test the resilience of India’s domestic demand amid rising interest rates.

Reasons for the expected cooling of consumer inflation

• Fuel inflation expected to reduce: Fuel inflation is expected to reduce to 3% from a high of over 10% in the current fiscal because some easing of crude oil prices is likely as global growth slows down.
• Decline in core inflation: Slowing domestic growth will ease core inflation from very sticky levels of over 6% last fiscal to 5.5% in the current one. However, the decline in core inflation will be limited as input cost pressures have not dissipated. To protect their margins, firms will continue to pass on input costs to end-consumer. Services inflation will also continue to exert pressure as the rotation of consumption demand from goods to services continues.
• Moderate food inflation: Food inflation, which has a high weightage in the Consumer Price Index and has driven headline inflation in the past, is projected to moderate to slightly below 5%, assuming a normal monsoon. However, food inflation has always been volatile and carries upside risks largely because of climate-related factors affecting agriculture output and prices.

How slowing global growth will hurt India’s exports?

• The impact of the growth slowdown in the US and Europe is deeper than the recovery in China: The US and Europe have a combined GDP that is twice that of China. Therefore, the impact of the growth slowdown in the US and Europe will be deeper than the recovery in China. This will hurt India’s exports to the US and Europe.
• India’s exports to the US and Europe are more than to China by a factor of six: India exports more to the US and Europe than to China by a factor of six. Therefore, the negative impact of the growth slowdown in the US and Europe will be felt more by India than by China.
• India’s growing dependence on commodity exports makes it more vulnerable to global growth volatility: India’s exports of petroleum products and steel are growing, and this makes India more vulnerable to global growth volatility. As global growth slows down, demand for commodities is likely to decline, which will hurt India’s exports.

External vulnerabilities

• India’s external vulnerability is expected to decline with a narrower current account deficit (CAD) and modest short-term external debt.
• The CAD is expected to narrow to 2% of GDP this fiscal from an estimated 2.5% last fiscal.

Conclusion

• The RBI’s decision to pause on rate hikes is driven by expectations of a decline in inflation. However, inflation risks remain, and the impact of rate hikes on GDP growth is expected to be significant. India’s external vulnerabilities are expected to decline, but the banking turmoil playing out amid interest rate hikes by important central banks and elevated debt levels remains a risk. The RBI’s decision to pause rate hikes will be closely watched, and further rate hikes may be necessary if inflation risks persist.

Centre foresees ‘stagnation’ in milk production

The Centre is foreseeing “stagnation” in milk production and a possible scarcity in the availability of ghee and butter as an impact of the Lumpy Skin Disease (LSD) that took the lives of about 1.89 lakh cattle recently.

More about the news:

v  Union Secretary, Department of Animal Husbandry & Dairying said all options, including import of certain milk products, would be considered by the government if the situation remained unchanged.

v  He said the increase in the prices of fodder and its scarcity was another reason for the “price inflation” in milk and its products. The last time when the country imported milk products were in 2011.

v  Milk production is growing at 6% per year, this year, it is either stagnant or has grown at 1 or 2%. The demand for milk, however, has grown up by about 8 to 10%. The demand was suppressed during the COVID-19 lockdowns.

v  Fodder crop cultivation area is around 4% for the last five decades; our dairy sector is growing at a rate of 6%. Seasonal and regional scarcity results in price rises.

v  The aim is to ensure that farmers are protected, but consumers also don’t face too much of a burden. The intervention will be through the public sector such as the National Dairy Development Board.

v  In the current situation of LSD, 1, 89,000 livestock have died due to the pandemic. Nine crores, almost one-third, of the cattle have been vaccinated. The only way to protect us from future pandemics is through a holistic approach called ‘One Health’, which focuses on the health of people, animals, and the environment.

Political Leaders Cannot Claim Higher Immunity

The Supreme Court told a united Opposition of 14 national parties that political leaders stand absolutely on the same footing as any ordinary citizen of India and are not entitled to “higher immunity” from investigation, arrest, or prosecution. The parties withdrew their joint petition claiming that the Centre was arbitrarily using agencies like the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI) to arrest and institute criminal proceedings against Opposition leaders who expressed their fundamental right to dissent or disagree with the Narendra Modi -led government.

Triple test

• The parties had suggested a “triple test” to be followed before ordering the arrest and remand of political leaders. These included factors like whether a person was a flight risk or whether there was a reasonable apprehension of the tampering of evidence or the influencing or intimidation of witnesses.
• They also proposed that alternatives like an interrogation at fixed hours or, at most, house arrest be used to meet the demands of investigation.
• The petition said that courts should follow the principle of ‘bail as a rule, jail as exception’, especially in cases involving “non-violent offenses”.
• “A political leader is a citizen. As citizens, we are all amenable to the same law. Political leaders do not enjoy immunity”.
• The court referred to instances when a political leader may be accused of a scam involving hard-earned savings or pensions.

No Separate laws

• The CJI pointed out that the statistics enumerated by the parties applied only to politicians, but the court cannot devise guidelines to apply only to politicians.
• Any guidelines, especially concerning personal liberty and life, issued by the apex court would apply equally to all citizens alike, and not just the political class.

PM holds talks with Bhutan King

Prime Minister Narendra Modi and Bhutanese King Jigme Khesar Namgyel Wangchuck discussed the latest situation along the India-Bhutan border as well as the progress in boundary talks between China and Bhutan, particularly above the Doklam tri-junction point.

More about the news:

The two leaders had discussed the “entire gamut” of bilateral cooperation and issues of national and regional interests, the two countries share an “exemplary” relationship of “trust, goodwill, and mutual understanding”.

 ‘Shared national interests

v  India has reiterated its position that any questions over the tri-junction between India, China, and Bhutan would be resolved “trilaterally”.

v  Both countries deeply value close friendship and the vision of guiding India-Bhutan relations to new heights.

About reforms and development focus:

Ø  The focus of the talks was on bilateral ties and, in particular, the Bhutanese King’s “Transformation Initiatives and Reforms Process”, as well as India’s support for Bhutan’s development plans, including the 13th Five Year Plan that starts from next year.

Ø  Bhutan is set to graduate from the list of Least Developed Countries in 2023, and its 21^st-century Economic Roadmap aims to turn the Himalayan kingdom into a developed country with a per-capita income of $12,000 in the next 10 years.

Ø  India has also agreed to extend Bhutan a third additional standby credit facility.

Ø  The leaders discussed India’s financial support for reforms and institutional capacity building, infrastructure and connectivity projects, energy cooperation including hydropower and solar energy projects, as well as space cooperation including the recent launch of the India-Bhutan satellite.

Hydropower:

• The government has agreed to a long pending demand to increase the power tariffs for the Chhukha hydroelectric project, which began operations with India’s help in 1986.
• India has also agreed to discuss buying power from the Basochhu hydel project that was built with Austrian support in 2008.
• The two sides would try to expedite the long pending negotiations on the reservoir-based 2,500 MW Sankosh hydel project that has been stuck for decades over environmental and cost concerns.

Infrastructure:

ü  India is also examining the possibility of setting up the first Integrated Check Post along the India-Bhutan border at Jaigaon and expediting the proposed Kokrajhar-Gelephu rail link project.

ü  Bhutan is working on constructing its second international airport at Guelph, near the border with India, and the rail link project would help build the southern Bhutanese city into a hub for attracting international investment.

ü  This would be the first-ever rail link between India and Bhutan, which naturally links up well with the rest of the regional connectivity infrastructure in South Asia.

Skilling investments:

Ø  Bhutanese citizens continue to receive “national treatment” in India, on par with Indian citizens, but both countries were looking for new ways to build on the partnership.

Ø  Indian companies are also keen to invest in Bhutan, in terms of skilling and training, in the areas of education and digital technology.

Ø  India and Bhutan have been collaborating on the fin-tech, start-up, and emerging technology fronts and should expand the ambit of this collaboration to properly utilize the energy and potential of our youth.