Financial Spectrum: What does 2024 mean at the individual level?

Financial Spectrum: What does 2024 mean at the individual level?

What happens to pricing of deposits and credit? From the point of view of savers the present regime may be considered to be best

Madan SabnavisUpdated: Saturday, January 06, 2024, 05:13 PM IST
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Representative Pic | File

When we talk of 2024, there are several projections made at the macro level which would probably materialise. These include projections on GDP growth, consumption, investment, exports and so on. But these indicators may not matter too much at the micro level. What matters more is how a household budget can be managed. Here two factors would be of concern to all households. The first is taxation which is driven mainly by the budget and the other is interest rates as it has a bearing on savings and borrowings. What is the outlook on both for the year?

The budget to be announced on February 1 will be an interim one. This means that there can be no fundamentally new announcements made in the normal course. Technically once the elections are announced, there can be no policy announcements that can influence voters. However, so far there has been no formal announcement and hence there is nothing that stops new policies. But the FM has already indicated that being an election year, there will be nothing exciting this time and it will be the full budget announced probably in June-July which will have something substantial. Therefore, a vote-on-account or interim budget will be one which will simply let the existing provisions hold so that no programme gets stopped because of availability of funds.

Interestingly in the past there have been some new policies announced which were technically permitted because of the need of the day. But it can be assumed that there would be no such contingency this year when the economy is doing very well. Therefore we may not expect any tax changes for sure. In fact, if one goes by the pattern of income tax structures in the last few years, there has only been a focus on two things. The first is to migrate everyone to a system which has a simpler structure with no exemptions. It is still optional but one can guess will become mandatory at some point of time. The other has been done to create a level playing field across all tax structures for various forms of earnings like dividend or capital gains on debt instruments. Hence the aim is to move to a system that generates more revenue with existing structures.

With the February budget having nothing to offer, one can hope for the main budget to open the doors for some sops. However, this may not happen as demands for lower tax rates has been pending and has not been on the priority list. Instead, the government has followed aggressive redistribution schemes for the lower income groups through various programmes. This ideology may be expected to continue.

The second concern for everyone is interest rates. The RBI had hiked the repo rate from 4% to 6.5% since May 2022. The whole idea was to restore the system to normal as the so-called equilibrium repo rate in India has been in the region of 6%. The Ukraine war and accompanying high inflation provided the nudge for this correction. The higher repo rate has also meant that both deposits and lending rates have moved up with different speed. Now, with the economy being fairly strong and inflation appearing to be under control though still high presently, there is scope for changes during the course of the year.

The RBI has maintained that the inflation goal is 4% and that it will strive to reach this level. This, however, does not mean that it is imperative for the 4% mark to be achieved before there is a rate cut. Presently inflation is around 6% and going by the forecasts put out by RBI will remain above 5% till June 2024. Subsequently it is expected to come down to 4% in Q2 and rise to 4.7% in Q3 of this fiscal. Intuitively with inflation coming down to 4% in Q2-FY25, there is reason to believe that the RBI will lower rates at this point of time.

The quantum of reduction for rates is the next important policy decision. Given that inflation will be in the 4.5-5% range for the year, it can be expected that the repo rate cut can be of the order of 25-50 bps provided these inflation numbers do not change. It has been seen that food price shocks has distorted the inflation numbers in 2023 as there were shortages of pulses. There is no assurance that this will not be replicated in 2024. Therefore a maximum of 50 bps cut can be expected this year.

What happens to pricing of deposits and credit? From the point of view of savers the present regime may be considered to be best. It is unlikely that there would be another repo rate hike as inflation has been stable in the range of 5-6% presently. Hence, depending on the deposit rates offered by banks for different time buckets, the saver can make a decision. Currently banks have been modifying their deposit rates for certain maturity buckets depending on their requirements as liquidity has been under pressure. This will continue till March as it has been observed that savings have been moving to the mutual funds industry of late due to better returns though risk is higher.

On the borrowing side, there could be automatic relief for home or vehicle buyers when the repo rate comes down. Here loans are fixed to an external benchmark by rule which means that they are benchmarked with the repo rate or any other such variable. This means that as the repo rate goes up or down, there is automatic repricing of such loans, making transmission automatic.

Hence, 2024 will be a year of lower interest rates, though this is more likely in the second half. Savers would have to take advantage of the deposit rate structure before the repo rate is altered downwards as the possibility of an increase is quite remote. As borrowers, waiting for some time may work in case the purpose can be deferred.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal

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