RBI on Wednesday 8th February started by reminding the historical significance of 2023 for the Reserve Bank of India. 2023 marks the 75th year of public ownership of the Reserve Bank and its emergence as a national institution. Coming to present times, the unprecedented events of the last three years have put to test monetary policy frameworks globally. In a very short period, monetary policies across the world have veered from one extreme to the other in response to a series of overlapping shocks, emerging market economies (EMEs) are facing sharp trade-offs between supporting economic activity and controlling inflation, while preserving policy credibility. As global fault lines emerge in trade, technology and investment flows, there is an urgent need to reinforce global cooperation. The world is looking to India, now at the helm of G-20, to energise global partnership in several critical areas.
MPC’s rationale for its decisions on the policy rate and the stance– The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent, though it still remains well above the target in major economies. The situation remains fluid and uncertain. Reflecting the recent optimism, the IMF has revised upwards the global growth estimates for 2022 and 2023. As price pressures wane, several central banks have opted for slower rate hikes or pauses. The US dollar has retreated sharply from its highest level in two decades. Tighter financial conditions caused by aggressive monetary policy actions, volatile financial markets, debt distress, protracted geopolitical hostilities and fragmentation continue to impart high uncertainty to the outlook for the global economy. Looking ahead, while inflation is expected to moderate in 2023-24, it is likely to rule above the 4 per cent target. The outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude oil prices. The MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects.
| POLICY RATES | Current | Previous |
| Policy Repo Rate | 6.50% | 6.25% |
| Standing Deposit Facility Rate | 6.25% | 6.00% |
| Marginal Standing Facility Rate | 6.75% | 6.50% |
| Bank Rate | 6.75% | 6.50% |
| RESERVE RATIOS | Current | Previous |
| CRR | 4.50% | 4.50% |
| SLR | 18.00% | 18.00% |
Decisions and Deliberations of the Monetary Policy Committee (MPC):
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MPC decides to increase the policy repo rate by 25 basis points to 6.5%, Repo Rate saw an increase of 250 bps (It was 4% In April & it’s 6.5% now).
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The standing deposit facility (SDF) rate stands adjusted to 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75% hiked by 25 basis points.
Assessment of Growth:
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Urban consumption demand has been firming up, driven by a sustained recovery in discretionary spending, especially on services such as travel, tourism, and hospitality.
- Rural demand continues to show signs of improvement as tractor sales and two-wheeler sales expanded in December.
- Passenger vehicle sales and domestic air passenger traffic posted robust year-on-year (y-o-y) growth. Domestic air passenger traffic crossed pre-pandemic levels for the first time in December 2022.
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The total flow of resources to the commercial sector has increased by ₹20.8 lakh crore during 2022-23 so far as against ₹12.5 lakh crore a year ago.
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In several sectors such as cement, steel, mining, and chemicals, there are signs that additional capacity is being created in the private sector.
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Non-food bank credit expanded by 16.7 per cent (y-o-y) as on January 27, 2023.
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Seasonally adjusted capacity utilization increased to 74.5% in Q2 2022-23. The drag from net external demand, on the other hand, continued as merchandise exports contracted in Q3 2022-23.
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PMI manufacturing and PMI services remained in expansion at 55.4 and 57.2 respectively, in January 2023.
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On the supply side, agricultural activity remains strong with good Rabi sowing, higher reservoir levels, good soil moisture, favorable winter temperature, and comfortable availability of fertilizers.
Assessment of Inflation:
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CPI inflation moderated by 105 basis points to 5.75% during November-December 2022 from its level of 6.8% in October 2022.
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As a result of softening in food inflation on the back of a sharp deflation in vegetable prices earlier than anticipated, inflation for Q3:2022-23 has turned out to be lower than the projections. Core CPI inflation, however, remained elevated.
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The food inflation outlook will benefit from a likely bumper Rabi harvest led by wheat and oilseeds. Mandi arrivals and kharif paddy procurement have been robust, resulting in improvement in the buffer stocks of rice.
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The ongoing pass-through of input costs, especially in services, could keep core inflation at elevated levels.
- With services activity showing a strong rebound and some improvement in pricing power, risks of higher pass-through of input costs, however, do remain.
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The low volatility of the Indian rupee relative to peer currencies limits the impact of imported price pressures and other global spillovers.
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Assuming an average crude oil price (Indian basket) of US$ 95 per barrel.
RBI GDP and CPI Estimates:
| GDP Current Estimates | CPI Current Estimates | |
| FY-24 | 6.40% | 5.30% |
| Q1FY24 | 7.80% | 5% |
| Q2FY24 | 6.20% | 5.40% |
| Q3FY24 | 6% | 5.40% |
| Q4FY24 | 5.80% | 5.60% |
INR Depreciation:
The Indian Rupee has remained one of the least volatile currencies among its Asian peers in the calendar year 2022 and continues to be so this year also. Similarly, the depreciation and the volatility of the Indian rupee during the current phase of multiple shocks is far lower than during the global financial crisis and the taper tantrum. In a fundamental sense, the movements of the rupee reflect the resilience of the Indian economy.
External Sectors:
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The current account deficit (CAD) for the first half of 2022-23 stood at 3.3% of GDP. The situation has shown improvement in Q3:2022-23 as imports moderated in the wake of lower commodity prices, resulting in the narrowing of the merchandise trade deficit
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Services exports rose by 24.9% (y-o-y) in Q3:2022-23, driven by software, business and travel services. Global software and IT services spending is expected to remain strong in 2023. Remittance growth for India in H1 of 2022-23 was around 26%.
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FDI flows remain strong at US $ 22.3 billion during April-December 2022, corresponding to period last year at US $ 24.8 billion.
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Foreign portfolio flows have shown signs of improvement with positive flows of US$ 8.5 billion during July to February 6, led by equity flows
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Foreign exchange reserves have rebounded from US$ 524.5 billion on October 21, 2022 to US$ 576.8 billion as on January 27, 2023
Source: RBI Press Releases
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