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Policies In Place, Time To Be Future Ready

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Policies In Place, Time To Be  Future Ready
Policies In Place, Time To Be Future Ready
Shanti Ekambaram - 30 November 2022

The military-economic alliance in place in the West since the end of WWII (North Atlantic Treaty Organization, and the European Union), made possibilities of a war breaking out in Europe beyond belief. So, when Russia invaded Ukraine, it sent shockwaves across the world, which was emerging from the chaos of Covid.

The impact on the Indian economy was manifold. For a nation critically dependent on imported oil and other key commodities, whose prices rose sharply, it adversely impacted our current account and the value of the rupee. When persistently high inflation due to easy money policy and supply chain shortages led to the US Federal Reserve raising interest rates multiple times, the resulting outflow of money from all markets into the US further accentuated the problem.

That said, the Indian economy and the rupee have fared much better than most developing and even developed economies, largely due to robust domestic consumption and active steps taken via monetary and other fiscal policies.

While the Indian government and the Reserve Bank of India (RBI) have done a stellar job of managing the headwinds, it seems inevitable that 2023 will see an overhang of global macroeconomic forces on the Indian economy.

Europe and Japan are grappling with recession. The US Fed narrative continues to be aggressive on taming inflation and increasing interest rates, while China’s zero-Covid policy could lead to disruptions in demand and value chains.

One critical element that will play a major role is the price of crude. India has managed to source oil from Russia despite Western pressure. Prices have remained stable in the past few months. If oil remains around this level, India will be in a good position. But if it reverses to its higher prices of $120, we will have to fight higher inflation.

 

The other crucial variable is stability of the rupee. For sure, the rupee has depreciated, but RBI has managed volatility well. Thus, currency is likely to be range-bound as we get into 2023. India also depends on capital flows through foreign portfolio investors (FPIs) and foreign direct investments (FDIs), and remittance and service exports to support currency inflows. Exports are lagging, but imports have been strong, given the domestic consumption and economic growth. So, current account deficit is a key variable to monitor.

The bedrock of the India story is robust domestic demand and market. Structurally speaking, the Indian economy is less export-dependent than several other Asian countries. In times of global macroeconomic headwinds, it stands us in good stead. So far, consumption has been strong, and we are beginning to see some signs of capex investments, while capacity utilisation is inching up.

We are cautiously optimistic about 2023. India was among the best-performing large economies in 2022 despite adverse global macroeconomic circumstances. A normal monsoon is favourable for agriculture, and boosts consumer demand.

After two years of Covid, the small and medium enterprises (SME) sector is recording good growth  investing in capacities. We are likely to see capacity enhancements in specialty chemicals, data centres, renewable energy, logistics, and warehouses, among others. Capacity utilisation, which was muted during the pandemic, has crossed 75 per cent, another positive. The Indian economy is likely to grow at at 6-6.25 per cent in 2023, given the slowdown in exports and global headwinds.

To turbocharge growth, we believe that India needs massive investments in infrastructure, healthcare, education, and skilling, to name just a few areas. This has to come from both the government and the private sector. So far, we have not seen the strong capex investment cycle that is needed to sustain economic growth. It will be a tricky balancing act for the government, given the overhang of the government’s social sector, healthcare spending and subsidies during and post Covid. The Union Budget will provide an indication of the government’s likely action on investments.

The health of the financial services industry is intrinsically linked with the state of the Indian and the global economy. The interest rate will likely peak at 6.5 per cent. We expect a 35 basis points (bps) hike in December, followed by another 25 bps hike. This, of course, will depend on inflation, demand, and global factors, particularly dollar rates and volatility. In short, 2023 is likely to see a more stable interest rate scenario than the current fiscal. Key factors to watch out for are the price of oil, FDI and FPI inflows and US interest rates.

While the factors that impact the Indian economy will undoubtedly have resonance in the banking sector, banks also need to do their bit to be resilient and future-ready.

In today’s digital world, not only customers have greater knowledge and choice, they can also compare service delivery across all providers. Banks, therefore, need to base all their services on a bedrock of technology and employ the right talent to draw the best out of the technologies deployed. These technologies will not only allow banks to be more cost-efficient, but with effective use of data analytics, offer hyper-personal and hyper-customised offerings to the different cohorts of customers.

Mahatma Gandhi had once said, “The future depends on what we do today.” We believe that customer experience, technology, prudent risk management and a differentiated mix of talent will drive the future of financial services.


Shanti Ekambaram, Whole-Time Director, Kotak Mahindra Bank

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