The Indian economy has shown resilience in recent years, despite facing a number of challenges. The Reserve Bank of India has played a key role in supporting the economy, and the economy has a number of strengths, including a young and growing population, a large domestic market, and a strong manufacturing sector. However, the economy also faces a number of challenges, including rising inflation, geopolitical tensions, and slowing global growth. Overall, the Indian economy is in a state of flux, but it has the potential to continue to grow and prosper in the coming years.
MPC’s rationale for its decisions on the policy rate and the stance- The Reserve Bank of India’s Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6.50% in its June 2023 meeting. The MPC acknowledged the global economic slowdown and rising inflation, but decided to keep the repo rate unchanged as the full effects of the previous rate hikes are still working their way through the system. The MPC will continue to monitor the evolving inflation and growth outlook and take appropriate action as needed.
The MPC’s decision to keep the repo rate unchanged is a sign that the RBI is prioritizing growth over inflation at this time. However, the MPC has made it clear that it is committed to bringing inflation under control and will take action as needed. The RBI will continue to monitor the evolving inflation and growth outlook and will adjust its monetary policy stance as needed.
|Policy Repo Rate
|Standing Deposit Facility Rate
|Marginal Standing Facility Rate
Decisions and Deliberations of the Monetary Policy Committee (MPC):
The policy repo rate will remain at 6.50%, the standing deposit facility (SDF) rate will stay at 6.25%, the marginal standing facility (MSF) rate and the Bank Rate will remain at 6.75%, Repo Rate saw an increase of 250 bps (It was 4% In April 2022 & it’s 6.5% now).
5 out of 6 members of the MPC decided to focus on withdrawing accommodation to help align inflation with the target while still supporting growth.
Assessment of Growth:
- GDP growth:The Reserve Bank of India (RBI) has projected real GDP growth for 2023-24 at 6.5%. This is slightly lower than the growth rate of 7.2% achieved in 2022-23.
- Domestic demand:
Domestic demand conditions are expected to remain supportive of growth in 2023-24. Household consumption is expected to be supported by higher rabi crop production, expected normal monsoon, continued buoyancy in services and softening inflation. Investment activity is also expected to pick up, supported by robust government capital expenditure and healthy twin balance sheets of banks and corporates.
- External demand:
External demand is expected to remain weak in 2023-24. The global economic outlook is clouded by a number of factors, including the war in Ukraine, rising inflation and interest rates, and slowing economic growth in China.
The RBI has noted that there are a number of risks to the outlook for 2023-24. These include weak external demand, volatility in global financial markets, protracted geopolitical tensions and intensity of El Nino impact.
Assessment of Inflation:
- Headline inflation:
Headline inflation has come down to 4.7% in April 2023, the lowest reading since November 2021. This is due to a number of factors, including monetary policy tightening, supply side measures, and the recent rabi harvest remaining largely immune to the adverse weather events.
- Core inflation:
Core inflation, which excludes food and fuel prices, has also moderated to 5.1% in April 2023. This is a positive sign, as it suggests that the underlying inflation pressures are easing.
- Outlook for 2023-24:
The RBI has projected headline inflation at 5.1% for 2023-24. This is slightly higher than the current level of inflation, but it is within the RBI’s target range of 2-6%. The RBI has noted that there are a number of risks to the inflation outlook, including the geopolitical tensions, uncertainties around the monsoon, and volatility in global financial markets.
RBI’s GDP and CPI Estimates:
|GDP Current Estimates
|GDP Previous Estimates
|CPI Current Estimates
|CPI previous Estimates
Liquidity and Financial Market Conditions:
- Surplus liquidity:
There is currently surplus liquidity in the Indian banking system. This is due to a number of factors, including the maturing of TLTROs (Targeted long-term repo operations), the decline in currency in circulation, and the pick-up in government spending.
- Skewed liquidity distribution:
The surplus liquidity is not evenly distributed within the banking system. Some banks are experiencing surplus liquidity, while others are experiencing shortages.
- Reserve Bank’s response:
The Reserve Bank of India has taken a number of steps to address the surplus liquidity situation. These include conducting variable rate repo (VRR) auctions, variable rate reverse repo (VRRR) auctions, and open market operations.
The Reserve Bank of India expects the surplus liquidity situation to persist in the near term. However, the RBI will continue to monitor the situation and take appropriate action as needed.
- Trade deficit:
The trade deficit has narrowed in recent months, due to a sharper decline in imports than exports.
- Current account deficit:
The current account deficit (CAD) is expected to have moderated further in Q4:2022-23 and should remain eminently manageable in 2023-24.
- Foreign portfolio investment (FPI) flows:
FPI flows have seen a significant turnaround in 2023-24, led by equity flows.
- Foreign direct investment (FDI) flows:
FDI flows to India were US\$28.0 billion in 2022-23, compared to US\$38.6 billion in the previous year.
- Net inflows under non-resident deposits:
Net inflows under non-resident deposits increased to US\$8.0 billion during 2022-23 from US\$3.2 billion in the previous year.
- Indian rupee:
The Indian rupee has remained stable since January 2023.
India’s external sector remains resilient as key indicators, such as CAD to GDP, external debt to GDP and international investment position (IIP) to GDP ratios continue to improve. Foreign exchange reserves stood at a comfortable level of US\$595.1 billion (as on June 2, 2023). Inclusive of net forward assets, foreign exchange reserves are well above US\$600 billion.
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