India is widely seen as a bright spot in an otherwise gloomy world, says MPC

RBI today said that by the end of yet another turbulent year, the global economy is still marred by profound shocks and unprecedented uncertainty, there are mixed signals emanating from the geopolitical situation and financial market volatility. Though international energy, food, and other commodity prices have eased moderately in recent times, inflation remains high and broad-based. The IMF has projected that more than one-third of the global economy will contract this year or next year. While no country is spared the ill effects of such large shocks, emerging market economies (EMEs), especially the ones dependent on energy, food, and commodity imports, have been the worst affected. In this hostile international environment, the Indian economy remains resilient, drawing strength from its macroeconomic fundamentals. India’s financial system remains robust and stable. Banks and corporates are healthier than before the crisis. India is widely seen as a bright spot in an otherwise gloomy world. Yet, our inflation remains elevated, as in most parts of the world. Global spillovers continue to impart high volatility and uncertainty.

Decisions and Deliberations of the Monetary Policy Committee (MPC):

• MPC decided to increase the policy repo rate by 35 basis points to 6.25 %, with immediate effect, the Repo Rate saw an increase of 225 bps as it was 4% in April & it is 6.25% now.

• The standing deposit facility (SDF) rate stands adjusted to 6.00 %, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 %

• The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

MPC’s rationale for its decisions on the policy rate and the stance–

Growth prospects across the world are dampening, financial markets remain nervous, and are characterized by high volatility and price swings. For the Indian economy, the outlook is supported by good progress of Rabi sowing, sustained urban demand, improving rural demand, a pick-up in manufacturing, a rebound in services, and robust credit expansion. Consumer price inflation moderated to 6.8 % (y-o-y) in October as expected, but it still remains above the upper tolerance band of the target. Core inflation is exhibiting stickiness. Adjusted for inflation, the policy rate still remains accommodative. Over the next 12 months, inflation is expected to remain higher than the 4 % target. System liquidity remains in surplus with an average daily absorption under the liquidity adjustment facility (LAF) of ₹1.6 lakh crore in November 2022. Since then, it has gone up to ₹2.6 lakh crore as of 5th December. The overall monetary and liquidity conditions remain accommodative and hence, the MPC decided to remain focused on the withdrawal of accommodation.

Assessment of Growth:

• Real gross domestic product (GDP) posted a growth of 6.3 % year-on-year (y-o-y) in Q2:2022-23, driven primarily by private consumption and investment

• Non-food bank credit rose by ₹10.6 lakh crore during April-November 2022 as compared with an increase of ₹1.9 lakh crore last year.

• The total flow of resources to the commercial sector expanded by ₹14.7 lakh crore during 2022-23 (up to November 2022) as compared with ₹6.8 lakh crore in the same period of 2021-22.

• Merchandise exports contracted by 12.1 % (y-o-y) after expanding during the previous 19 months. Merchandise imports expanded by 10.0 % in October.

• The manufacturing PMI rose from 55.3 in October to 55.7 in November. The PMI for the services sector expanded from 55.1 in October to 56.4 in November.

• RBI GDP Estimates:

	GDP Current Estimates	GDP Previous Estimates
FY-23	6.8%	7%
Q3FY23	4.4%	4.6%
Q4FY23	4.2%	4.6%
Q1FY24	7.1%	7.2%
Q2FY24	5.9%	—

Assessment of Inflation:

• CPI inflation moderated to 6.8 % (y-o-y) in October 2022 from 7.4 % in September.

• Food inflation softened, aided by easing inflation in vegetables and edible oils, despite sustained pressures from prices of cereals, milk, and spices

• Core CPI (i.e., CPI excluding food and fuel) inflation persisted at elevated levels at 6 %, with price pressures across most of its constituent sub-groups.

• Assuming avg. $100/bbl. for crude, inflation seen at 6.7% for FY23

• RBI CPI Estimates:

	CPI Current Estimates	CPI Previous Estimates
FY-23	6.70%	6.70%
Q3FY23	6.6%	6.5%
Q4FY23	5.9%	5.8%
Q1FY24	5%	5%
Q2FY24	5.5%	—

US Dollar Appreciation:

The appreciation of the US dollar this year, which precipitated large-scale depreciation of all major global currencies including the Indian rupee (INR), has drawn wide attention. The INR’s movements have been the least disruptive, relative to peers. In fact, the INR has appreciated against all other major currencies except a few. On a financial year basis (i.e., from April 2022 to October 2022), the INR has appreciated by 3.2 % in real terms, even as several major currencies have depreciated. The story of the INR has been one of India’s resilience and stability

External Sector:

• The growth of services exports, mainly contributed by software, business, and travel services remained robust at 29.1 % in April-October 2022.
• net foreign direct investment (FDI) flows have remained robust and rose to US $ 22.7 billion during April-October 2022 from US$ 21.3 billion in the corresponding period last year
• Foreign portfolio flows have resumed in recent months and were positive at US$ 11.8 billion from July to 5th December 2022, led by equity flows
• The size of forex reserves is comfortable and has also increased. It has gone up from US$ 524.5 billion on October 21, 2022 to US$ 561.2 billion as on December 2, 2022 covering around nine months of projected imports for 2022-23.

POLICY RATES
	Revised	Previous
Policy Repo Rate	6.25%	5.90%
Standing Deposit Facility Rate	6.00%	5.65%
Marginal Standing Facility Rate	6.50%	6.15%
Bank Rate	6.50%	:6.15%
RESERVE RATIO
CRR	4.5%	4.5%
SLR	18%	18%

 

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