Key Highlights:
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The MPC voted unanimously to increase the policy repo rate by 50 bps to 4.90%
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Reverse repo rate remains unchanged at 3.35%.
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Decided to remain focused on withdrawal of accommodation
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The marginal standing facility (MSF) rate and the Bank rate increased by 50 bps to 5.15 per cent.
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Projection for real GDP growth for FY23 retained at 7.2%. Consisting Q1 at 16.2%, Q2 at 6.2%, Q3 at 4.1% and Q4 at 4% for FY23
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Raised CPI inflation projection from 5.7% to 6.7% for FY23. This includes Q1 at 7.5%, Q2 at 7.4%, Q3 at 6.2% and Q4 at 5.8% for FY23. Crude Oil estimated at $105 per barrel for projection of CPI inflation
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Maintained Liquidity adjustment facility corridor at 50 basis points by increasing SDF (Standing Deposit facility) rate to 4.65% and MSF rate to 5.15%. Thus, at both ends of the LAF corridor, there will be standing facilities – one to absorb and the other to inject liquidity.
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Absorption under SDF and variable rate reverse repo (VRRR) of 14 days and 28 days was at Rs. 5.5 lakh crore during May 4-May 31 lower than Rs. 7.4 lakh crore during April 8-May 3, 2022.
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Foreign exchange reserves stands at US$ 601.1 billion as on June 3, 2022
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The Limits on individual home loans given by urban and rural co-operative banks are being revised upwards more than 100 percent taking into account the rise in housing prices over the last decade.
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Permit Rural Cooperative Banks (RCBs- State Cooperative Banks and District Central Cooperative Banks) to extend finance to commercial real estate.
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Credit cards, starting with RuPay credit cards, can now be linked to UPI. The implementation will begin with the indigenous RuPay credit cards being allowed to be linked, followed by other card networks such as Visa and Mastercard.
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The limit on recurring e-payments is now raised to Rs 15,000 from Rs 5,000 to further facilitate transactions such as subscriptions.
Outlook:
India’s Monetary Policy Committee increased repo rate by 50 bps as anticipated. Post the announcement, India’s 10 Year bond yield fall from 7.56% to 7.46%. So far, to absorb the excess liquidity RBI had been conducting VRRR auctions to at rates which firmed up closer to the policy repo rate. By introducing SDF in last policy meet, the RBI is maintaining the Liquidity Adjustment Facility or LAF corridor with SDF at the base at 4.65 per cent and MSF at 5.15 per cent. With repo window, it becomes difficult for RBI to provide such volume of government securities in return. In this sense, the Standing Deposit Facility (SDF) is a collateral free arrangement meaning that RBI need not give collateral. Inflation is still the worry for the economy and likely to remain above the RBI’s upper tolerance band of 6 per cent through the first three quarters of 2022-23. Going forward, it is expected that repo rate will be further increased by RBI to maintain the CPI inflation price band of 2-6 per cent.
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