RBI Keeps Repo Rate Unchanged at 6.50%, Sees Real GDP at 7% for FY24-25
Moneylife Digital Team 08 February 2024
As predicted by economists, the monetary policy committee (MPC) of Reserve Bank of India (RBI) kept the repo rate unchanged at 6.50% during its February bi-monthly meeting. The marginal standing facility (MSF) rate and the bank rate will be steady at 6.75%. RBI's policy stance continues to be 'withdrawal of accommodation', with five out of six MPC members voting in its favour, governor Shaktikanta Das says. 
The repo rate under the liquidity adjustment facility (LAF) will remain unchanged at 6.50%. Consequently, the marginal standing facility (MSF) rate and the bank rate will be steady at 6.75%. 
In a statement, the RBI governor says, "Taking into account this growth-inflation dynamics and the fact that transmission of the cumulative 250bps (basis points) policy rate hike is still underway, the MPC decided to keep the policy repo rate unchanged at 6.50%. The MPC will carefully monitor any signs of generalisation of food price pressures which can fritter away the gains in easing of core inflation."
Monetary policy must continue to be actively disinflationary to align inflation to the target of 4% on a durable basis, Mr Das says, adding, "The MPC will remain resolute in this commitment. The MPC also decided to remain focused on the withdrawal of accommodation to ensure fuller transmission and anchoring of inflation expectations. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth."
"Let me reiterate that our policy stance is in terms of interest rate, which is the principal tool of monetary policy in the current framework. Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4% and our efforts to bring it back to the target on a durable basis," the RBI governor says.
So far as liquidity conditions are concerned, Mr Das says these are being driven by exogenous factors which are likely to correct in the foreseeable future, aided by RBI's market operations. "On our part, RBI remains nimble and flexible in its liquidity management through two-way 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 so as to ensure that money market interest rates evolve in an orderly manner and financial stability is maintained."

RBI has projected the real gross domestic product (GDP) growth at 7% for FY24-25. "Among the key drivers on the demand side, household consumption is expected to improve, while prospects of fixed investment remain bright owing to an upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates, and government's continued thrust on capital expenditure. Improving outlook for the global trade and rising integration in the global supply chain will support net external demand. Headwinds from geopolitical tensions, volatility in international financial markets and geoeconomic fragmentation, 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) at 7.2%; Q2 at 6.8%; Q3 at 7.0%, and Q4 at 6.9% (see chart 1). The risks are evenly balanced."
From its October 2023 trough of 4.9%, CPI inflation increased successively in the next two months to 5.7% by December. Food inflation, primarily vegetable price increases, drove the pick-up in headline inflation, even as deflation in fuel deepened. Core inflation (CPI inflation excluding food and fuel) softened to a four-year low of 3.8% in December. 
"Going forward, the inflation trajectory would be shaped by the evolving food inflation outlook," Mr Das says, adding "The usual seasonal correction in vegetable prices is continuing, though unevenly. Yet considerable uncertainty prevails on the food price outlook from the possibility of adverse weather events. Effective supply-side responses may keep food price pressures under check. The continuing pass-through of monetary policy actions and stance is keeping core inflation muted. Crude oil prices, however, remain volatile."
For FY23-24, RBI says CPI inflation is projected at 5.4%, with Q4 at 5.0%. "Assuming a normal monsoon next year, CPI inflation for FY24-25 is projected at 4.5% with Q1 at 5.0 5; Q2 at 4.0%; Q3 at 4.6% and Q4 at 4.7%," it added.
According to the MPC, domestic economic activity is holding up well and is expected to be backed by the momentum in investment demand, optimistic business sentiments and rising consumer confidence. 
"On the inflation front, large and repetitive food price shocks are interrupting the pace of disinflation that is led by the moderation of core inflation. Geopolitical events and their impact on supply chains, and volatility in international financial markets and commodity prices are key sources of upside risks to inflation. The cumulative effect of policy repo rate increases is still working its way through the economy. The MPC will carefully monitor any signs of generalisation of food price pressures to non-food prices which can fritter away the gains in the easing of core inflation," RBI says.
As the path of disinflation needs to be sustained, Mr Das says, the MPC decided to keep the policy repo rate unchanged at 6.50% in this meeting. 
Dr Shashanka Bhide, Dr Ashima Goyal, Dr Rajiv Ranjan, Dr Michael Debabrata Patra and Mr Das voted to keep the policy repo rate unchanged, while Prof Jayanth R Varma voted to reduce the policy repo rate by 25bps (basis points).
According to Dharmakirti Joshi, chief economist of CRISIL, Thursday's non-move means the MPC of RBI has not used the rate tool for the whole of this fiscal, nor has it changed its stance. "Liquidity management has been the preferred method to push up market interest rates, and the MPC feels this is the way forward till consumer inflation is aligned to the RBI's medium-term target of 4%. While fiscal prudence has smoothened the path for monetary policy, the RBI is wary of cutting rates or changing stance too soon given inflation is not fully tamed yet."

"We believe given the tensions around the Red Sea - and its attendant impact - and given the trajectory of food prices, an interest rate cut is unlikely in the April monetary policy review and would most probably come in June, if not later," he added.

Anuj Puri, chairman of ANAROCK group, says RBI extended the festive bonanza that it gave to the home-buyers in its last two policy announcements, and home-buyers may retain their advantage of relatively affordable home loan interest rates. "If we consider the present trends, the housing market has been unstoppable, and unchanged home loan rates will help maintain the overall positive consumer sentiments. Given that housing prices have risen across the top seven cities in the last year, this breather by the RBI is a distinct advantage to homebuyers."

According to ANAROCK Research, in 2023 average housing prices rose by anywhere between 10%-24% in the top-7 cities, with Hyderabad recording the highest 24% jump. The average prices in these markets stood at about Rs7,080 per sqft, while, in 2022, it was around Rs6,150 per sqft – a collective increase of 15%.
Here are the additional measures announced by the RBI governor...

Review of the Regulatory Framework for Electronic Trading Platforms (ETPs)
RBI’s extant regulatory framework for ETPs was issued in 2018. In view of the subsequent developments in markets, products, and technology, a revised regulatory framework for ETPs will be issued for stakeholders’ feedback.

Hedging of Gold Price Risk in the Over-the-Counter (OTC) Market in the International Financial Services Centre (IFSC)
In December 2022, RBI permitted resident entities to hedge their gold price risk in recognised exchanges in the IFSC. It has now been decided to also allow resident entities to hedge the price of gold in the OTC segment in the IFSC. This will provide more flexibility to resident entities in hedging their exposure to gold prices.

Key Fact Statement (KFS) for Retail and MSME Loans & Advances
At present, the loans and advances availed by borrowers, apart from including the rate of interest, also include other fees and charges such as processing fees, documentation charges, etc. To enhance transparency in the disclosure of such information, the Reserve Bank had mandated certain categories of lenders to provide the borrower with a KFS containing essential information such as the all-inclusive annual percentage rate (APR) and recovery and grievance redress mechanism. The requirement of KFS is now being extended to cover all retail and MSME loans. This measure will lead to enhanced transparency in lending and enable customers to make informed decisions.

Enhancing the Robustness of AePS
Aadhaar Enabled Payment System (AePS) has played an important role in financial inclusion by enabling customers to make digital payment transactions through service providers such as business correspondents. Given their significance, it is proposed to streamline the process for on-boarding of AePS service providers and introduce some additional fraud risk management measures. These measures will further strengthen the security of the AePS system and enhance its robustness.

Principle-Based Framework for Authentication of Digital Payment Transactions
Over the years, RBI has proactively facilitated the introduction of various mechanisms, such as an additional factor of authentication (AFA) for securing digital payments. While no particular mechanism was specified by RBI, SMS-based OTP has become very popular. With technological advancements, however, alternative authentication mechanisms have emerged in recent years. Therefore, to facilitate the adoption of alternative authentication mechanisms for enhancing the security of digital payments, it is proposed to put in place a principle-based framework for authentication of such transactions.

Introduction of Programmability and Offline Functionality in Central Bank Digital Currency (CBDC) Pilot
The CBDC Retail (CBDC-R) pilot currently enables person-to-person (P2P) and person-to-merchant (P2M) transactions. It is now proposed to enable additional functionalities of programmability and offline capability in CBDC retail payments. Programmability will facilitate transactions for specific or targeted purposes, while offline functionality will enable these transactions in areas with poor or limited internet connectivity.

The next meeting of the MPC is scheduled for 3rd to 5 April 2024.
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