RBI Policy Review

Macroeconomic stability and inclusive growth are essential for a country’s progress. India’s policy mix has fostered macroeconomic and financial stability, and the external sector remains manageable. India is poised to become the new growth engine of the world, but it is important to remain vigilant and not give room to complacency. High inflation is a major risk to macroeconomic stability and sustainable growth, so the Reserve Bank’s monetary policy remains focused on aligning inflation to the 4% target on a durable basis.

MPC’s rationale for its decisions on the policy rate and the stance– The MPC noted that headline inflation had surged in July, but is expected to ease in the coming months. However, the overall inflation outlook is uncertain due to factors such as the fall in kharif sowing, low reservoir levels, and volatile global food and energy prices. Economic activity, on the other hand, has remained resilient. Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points which is still working through the economy, the MPC decided to keep the policy repo rate unchanged. The MPC also decided to remain focused on withdrawal of accommodation, as the transmission of the 250 basis points increase in the policy repo rate to bank lending and deposit rates is still incomplete. The MPC remains highly alert and prepared to undertake timely policy measures, as may be necessary, in order to align inflation to the target and anchor inflation expectations.

 

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).

• MPC decided to focus on withdrawing accommodation to help align inflation with the target while still supporting growth.

Assessment of Growth:

• Global Economy:

  The global economy is slowing due to tight financial conditions, geopolitical tensions, and geo-economics fragmentation. Global trade is contracting, and headline inflation is easing but still above target in major economies. Major central banks are signaling a peaking of their rate hike cycle, but the tight monetary policy stance could persist for longer than anticipated.

• India:

  The domestic economy in India is resilient, with strong domestic demand supporting industrial sector recovery and investment activity. Services sector activity is also maintaining buoyancy, and rural demand is showing signs of revival. Looking ahead, domestic demand conditions are likely to benefit from sustained buoyancy in services, consumer and business optimism, the government’s continued thrust on capex, healthy balance sheets of banks and corporates, and supply chain normalization. However, there are some headwinds to growth, including geopolitical tensions and geo-economics fragmentation, volatility in global financial markets, global economic slowdown, and uneven monsoon. Overall, the outlook for the Indian economy is positive, but it is important to be mindful of the risks posed by the global environment.

Assessment of Inflation:

• Inflation in India:

  Inflation in India was high in July and August, at 7.4% and 6.8%, respectively. This was largely driven by food prices, especially vegetables. Vegetables have a weight of around 6% in the CPI basket, and they contributed to about one-third of CPI headline inflation in July and to around one-fourth of overall inflation in August. Sustained inflationary pressures in cereals, pulses, and spices added to the overall food inflation. On the positive side, core inflation softened to 4.9% during July-August 2023. It has eased by around 140 basis points from its recent peak in January 2023. Further disinflation of the core component is critical for price stability.

• Outlook for 2023-24:

  While near-term inflation is expected to soften on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices, the future trajectory will be conditioned by a number of factors. For Kharif crops, the area sown under pulses is below the level a year ago. Kharif onion production needs to be watched closely. Demand-supply mismatches in spices are likely to keep these prices at elevated levels. The inflation trajectory will also be shaped by El Niño conditions and global food and energy prices. Together with global financial market volatility, these factors pose risks to the outlook.

RBI’s GDP and CPI Estimates:

	GDP Current Estimates	GDP Previous Estimates	CPI Current Estimates	CPI Previous Estimates
FY-24	6.50%	6.50%	5.40%	5.40%
Q2FY24	6.50%	6.50%	6.40%	6.20%
Q3FY24	6.00%	6.00%	5.60%	5.70%
Q4FY24	5.70%	5.70%	5.20%	5.20%
Q1FY25	6.60%	6.60%	5.20%	5.20%

Liquidity and Financial Market Conditions:

• Surplus Liquidity in the System:

  The RBI is concerned about the skewed liquidity distribution in the banking system, with banks preferring to place funds under the overnight SDF instead of offering them in the main 14-day VRRR operations. The RBI is urging banks to assess their actual liquidity requirements over the reserve maintenance cycle and bid accordingly in the auctions under main 14-day VRRR operations. It is also desirable that banks having surplus funds explore lending opportunities in the inter-bank call market rather than passively parking funds in the SDF at relatively less attractive rates. The RBI may have to consider OMO-sales (Open Market Operation sales) to manage liquidity in the future, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions.

• Financial Market Conditions:

  The Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth, and robust earnings growth. The credit growth is broad-based and backed by the strong fundamentals of financial institutions. The financial indicators of non-banking financial companies are also in line with that of the banking system. Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress.

External Sector:

• Current Account Deficit (CAD):

  The current account deficit (CAD) for Q1:2023-24 declined to 1.1% of GDP from a year ago. There was an accretion of US$ 4 billion to foreign exchange reserves on the balance of payments (BOP) basis during Q1:2023-24.

• Foreign Financing:

  FPI flows have seen a significant turnaround in 2023-24 with net FPI inflows at US$ 20.3 billion up to September 2023 as against net outflows in the preceding two years. Net FDI, on the other hand, moderated to US$ 5.8 billion in April-July 2023 from US$ 17.3 billion a year ago. The inflows under external commercial borrowings (ECBs) witnessed a turnaround, with net inflows of US$ 4.5 billion during April-August 2023 as against net outflows of US$ 3.2 billion a year ago. The number and total amount of ECB agreements grew markedly during April-August 2023 with about 60% of the total amount being raised for capital expenditure. External vulnerability indicators also indicate lower vulnerability in comparison with EME peers. India’s foreign exchange reserves stood at US$ 586.9 billion as of September 29, 2023.

Source: RBI Press Releases

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