MPC review: Rate cut not ideal yet. Rely on surplus liquidity and operation twist instead
Subscribe to enjoy similar stories. The upcoming monetary policy is crucial for several reasons, given the environment and uncertain outlook making the selection of policy tools critical. A repo rate cut, if it were to happen, will need to take cognisance of the impact on the rupee, given the narrowing rate differential between the US and India.
Furthermore, increasing financialization of the economy has intensified the interplay between macro-micro and financial market, heightening the risk to financial market stability. A liquidity infusion and operation twist may be more effective than only relying in the repo rate. An analysis of 3,444 listed companies’ H1FY25 results reveals flat-to-moderate revenue growth, a moderating trend in operating margins, and a resilient credit risk profile.
Revenue pressures have primarily arisen from reduced pricing power, global influences on exports, normalization of post-pandemic demand, and a slowdown in urban consumption. While falling general price levels have impacted top line growth, the correction in key raw material prices has helped margins for companies facing demand disruptions. Although broad-based capital expenditure has been lacking for some time, sectors such as iron & steel, cement, data centres, logistics, and renewables are showing healthy capex spending using internal accruals and debt.
The analysis indicates that the lagged effects of monetary policy are visible in FY25, with the overall increase in cost of debt around 200 basis points (bps) during FY22-H1FY25. Despite the rise in interest costs in FY24 and FY25, the adverse impact is not evident in the coverage and leverage ratios, as most balance sheets have deleveraged post-pandemic. Read more: FPIs double down on
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