RBI Keeps Repo Rate Unchanged at 6.50%, Sees FY24-25 GDP at 7%
Moneylife Digital Team 05 April 2024
As predicted by economists, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) kept the repo rate unchanged at 6.50% during its first bi-monthly meeting for FY24-25. The marginal standing facility (MSF) rate and the bank rate will be steady at 6.75%. It has been 14 months since RBI has increased the policy rates. That said, over the last one year, the central bank tightened monetary conditions by reducing liquidity.
 
The repo rate under the liquidity adjustment facility (LAF) will remain unchanged at 6.50%. Consequently, the MSF and bank rates will be steady at 6.75%, while the standing deposit facility (SDF) will remain at 6.25%. 
 
In a statement, Shaktikanta Das, governor of RBI, says, "The Reserve Bank will continue to focus on preserving financial stability and promoting a system that is robust, resilient and future-ready to support economic growth. Price stability will be a key component of this endeavour. Turning to the present, inflation is on a declining trajectory and gross domestic product (GDP) growth is buoyant. At this juncture, we should not lower our guard but continue to work towards ensuring that inflation aligns durably and sustainably to the target. Our goal is in sight, and we must remain vigilant."
 
Robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4.0%, the RBI governor says. "As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation. Under these circumstances, monetary policy must continue to be actively disinflationary to ensure the anchoring of inflation expectations and fuller transmission of past actions. The MPC, therefore, decided to keep the policy rate unchanged at 6.50% in this meeting and remain focused on the withdrawal of accommodation. The MPC will remain resolute in its commitment to aligning inflation to the target."
 
Strengthening rural demand, improving employment conditions and informal sector activity, moderating inflationary pressures, and sustained momentum in the manufacturing and services sector should boost private consumption. "The headwinds from protracted geopolitical tensions and increasing disruptions in trade routes, however, pose risks to the outlook. Taking all these factors into consideration, real GDP growth for FY24-25 is projected at 7.0% with the first quarter (Q1) growth at 7.1%, Q2 at 6.9%, Q3 at 7.0% and Q4 also at 7.0%," the governor says.
 
Looking ahead, Mr Das says RBI will remain agile and flexible in its liquidity management through main and fine-tuning operations in both repo and reverse repo. "We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity to ensure that money market interest rates evolve in an orderly manner that preserves financial stability."
 
According to the RBI governor, food price uncertainties continue to weigh on the inflation trajectory in the future. "A record rabi wheat production would help temper price pressure and replenish the buffer stocks. Moreover, an early indication of a normal monsoon augurs well for the kharif season. International food prices also remain benign." 
 
He says, "The tight demand-supply situation in certain categories of pulses and the production outcomes of key vegetables warrant close monitoring, given the forecast of above-normal temperatures in the coming months. Frequent and overlapping adverse climate shocks pose key upside risks to the outlook on international and domestic food prices."
 
"Two years ago, around this time, when CPI inflation had peaked at 7.8% in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis. In other words, it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished," Mr Das added.
 
Assuming a normal monsoon, RBI sees consumer price index (CPI) inflation for FY24-25 at 4.5%, with the Q1 at 4.9%; Q2 at 3.8%; Q3 at 4.6% and Q4 at 4.5%.
 
Dharmakirti Joshi, chief economist of CRISIL, says, "The transmission impact of rate hikes since May 2022 and regulatory measures on risky lending are still playing out. We expect growth and inflation in fiscal 2025 at 6.8% and 4.5%, respectively. Overall, the macro environment is likely to turn favourable for a rate cut by mid-2024 in our base case, lest oil prices and monsoons play a spoilsport."
 
Here are the additional measures announced by the RBI governor...
 
Trading of Sovereign Green Bonds in the International Financial Services Centre (IFSC)
With a view to facilitating wider non-resident participation in sovereign green bonds, a scheme for investment and trading in these bonds in the IFSC will be notified shortly.
 
RBI Retail Direct Scheme - Introduction of Mobile App
The RBI retail direct scheme was launched in November 2021. It is now proposed to launch a mobile app for accessing the retail direct portal. This will be of greater convenience to retail investors and deepen the G-sec market.
 
Review of Liquidity Coverage Ratio (LCR) Framework
Technological developments have enabled bank customers to instantly withdraw or transfer money from their bank accounts. While improving customer convenience, this has also created challenges for banks to deal with potential situations when, due to certain factors, a large number of depositors decide to instantly and simultaneously withdraw their money from banks. The developments in certain jurisdictions last year demonstrated the difficulties it can create for banks to deal with such situations. A need has, therefore, arisen to undertake a comprehensive review of the LCR framework for banks. A draft circular will be issued shortly for stakeholder consultation.
 
Dealing in Rupee Interest Rate Derivative products – Small Finance Banks
At present, small finance banks (SFBs) are permitted to use only interest rate futures (IRFs) for proprietary hedging. It has now been decided to allow SFBs to use permissible rupee interest derivative products. This will allow further flexibility to SFBs for hedging their interest rate risk and enhance their resilience.
 
Enabling UPI for Cash Deposit Facility
Deposit of cash through cash deposit machines (CDMs) is primarily being done through the use of debit cards. Given the experience gained from card-less cash withdrawal using UPI at the ATMs, it is now proposed to also facilitate deposit of cash in CDMs using UPI. This measure will further enhance customer convenience and make the currency handling process at banks more efficient.
 
UPI Access for Prepaid Payment Instruments (PPIs) through Third Party Apps
At present, UPI payments from PPIs can be made only by using the web or mobile app provided by the PPI issuer. It is now proposed to permit the use of third-party UPI apps for making UPI payments from PPI wallets. This will further enhance customer convenience and boost adoption of digital payments for small value transactions.
 
Distribution of Central Bank Digital Currency (CBDC) through Non-bank Payment System Operators
The CBDC pilots are currently in operation with increasing number of use-cases and participating banks. It is proposed to make CBDC-Retail accessible to a broader segment of users by enabling non-bank payment system operators to offer CBDC wallets. This will also facilitate testing of the resiliency of CBDC platform to handle multi-channel transactions.
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