RBI’s Latest Monetary Policy: Updates and Decisions
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Introduction: The Reserve Bank of India (RBI) recently concluded its latest bi-monthly monetary policy review, featuring significant announcements by Governor Shaktikanta Das. This update follows the previous reviews held in April and June 2023.
Interest Rate Decision and Global Economic Uncertainties: Governor Shaktikanta Das unveiled the decision of the Monetary Policy Committee regarding the interest rate. He also communicated additional decisions made by the central bank in light of ongoing global economic uncertainties. Market experts had earlier predicted that the RBI MPC would maintain the key policy rate without any changes.
The last two bi-monthly policy reviews were conducted in April and June. Notably, during the June 2022 review, the RBI MPC chose to retain the key repo rate at 6.50 per cent.
Inflation Outlook Revised for 2023-24
The Reserve Bank of India has adjusted its retail inflation projections for the fiscal year 2023-24. The new projection is set at 5.4 per cent, marking an increase from the previous projection of 5.1 per cent stated in the June monetary policy meeting.
Governor’s Remarks on Inflation:
RBI Governor Shaktikanta Das, during his post-policy meeting address, provided insights into the revised inflation outlook. Assuming a normal monsoon, he indicated that retail inflation would be revised to 5.4 per cent, with specific percentages allocated to different quarters. These include 6.2 per cent for Q2, 5.7 per cent for Q3, 5.2 per cent for Q4, and 5.2 per cent for Q1 of 2024-25.
Inflationary Factors and Balance of Risks:
Governor Das emphasized the even distribution of risks associated with the revised inflation outlook. This adjustment comes in the wake of a significant rise in retail inflation in India, primarily attributed to substantial increases in vegetable prices, particularly tomatoes. Other items such as meat and fish, eggs, pulses, products, and spices also experienced upward trends. After a two-year low of 4.25 per cent in May, retail inflation rose to 4.81 per cent in June. April witnessed an inflation rate of 4.7 per cent, while the preceding month recorded 5.7 per cent.
Promoting Digital Transactions:
In a bid to encourage digital transactions, the RBI proposed an increase in the per transaction payment limit for UPI Lite in offline mode. The current limit of ₹200 per transaction is set to be raised to ₹500. This move is expected to bolster the reach and usage of digital payments across the country.
Switching to Fixed-Rate Loans:
In an effort to provide relief to borrowers dealing with high interest rates, the RBI revealed plans to introduce a framework allowing borrowers to switch from floating interest rates to fixed interest rates. This framework, to be implemented shortly, will require lenders to transparently communicate with borrowers about tenor and equated monthly installments (EMIs).
Rate Hike Impact and Macroeconomic Fundamentals:
: Governor Das shed light on the effects of the cumulative rate hike of 250 basis points from FY23, stating that it is gradually permeating the economy. The repo rate increase cycle was halted in April following six consecutive rate hikes totaling 250 basis points since May 2022. He also emphasized India’s robust macroeconomic fundamentals, contributing around 15% to global growth, and the healthy state of banks with historic high levels of capital.
Ajit Kabi, a banking analyst at LKP Securities, noted that the recent MPC meet resulted in the unchanged policy rate of 6.5%. The inflation outlook for FY24 was raised to 5.4% from the previous estimate of 5.1%. The real GDP growth forecast for the year was pegged at 6.6%. The RBI MPC’s commitment to aligning inflation with the 4% target remains steadfast.
Commitment to Inflation Target and Ongoing Challenges: Governor Das reaffirmed the RBI’s commitment to achieving a sustainable 4% target for Consumer Price Index (CPI) inflation. Despite moderating inflation, he acknowledged the persisting inflationary risks stemming from volatile international food and energy prices, geopolitical tensions, and weather-related uncertainties.
Advancing Frictionless Credit Delivery: The Reserve Bank Innovation Hub is in the process of developing a Public Tech Platform for Frictionless Credit Delivery. This platform, set for a pilot launch, aims to establish an open architecture and open Application Programming Interface (API) standards, allowing seamless connectivity for all participants in the financial sector.
Maintaining Interest Rate Status Quo: Amid improving macroeconomic conditions, the RBI has chosen to maintain the status quo on interest rates. Since May 2022, the central bank has raised the repo rate by 250 basis points. This monetary policy decision holds significance against the backdrop of evolving domestic and global economic landscapes, influencing India’s economic recovery, inflation trends, and overall financial stability.
Revised Regulatory Framework for Infrastructure Debt Funds (IDFs): The RBI has introduced revised regulations for Infrastructure Debt Funds (IDFs). Key changes include eliminating the sponsor requirement for IDFs, enabling IDFs to finance toll-operate-transfer (ToT) projects directly, permitting IDFs to raise funds through External Commercial Borrowings (ECBs), and making tri-partite agreements optional for Public-Private Partnership (PPP) projects.
Transparent Framework for Interest Rate Resets: The RBI has proposed the implementation of a transparent framework for resetting interest rates on floating interest loans. This framework mandates Regulated Entities to clearly communicate with borrowers about resetting tenor and EMIs, offer options for transitioning to fixed rate loans or loan foreclosures, disclose associated charges, and ensure effective communication of essential information to borrowers.
Market Response: Following the RBI’s decision to maintain the repo rate at 6.5%, the Sensex and Nifty equity indices witnessed a decrease of over half a percent each. Governor Shaktikanta Das retained the FY24 GDP growth projections at 6.5%, while the CPI inflation forecast for FY24 was adjusted to 5.4%.