RBI Keeps Repo Rate Unchanged at 6.50%
Moneylife Digital Team 07 June 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 second bi-monthly meeting for FY24-25. Consequently, the Standing Deposit Facility (SDF) rate remains at 6.25%, and 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. RBI also decided to establish a digital payments intelligence platform for network-level intelligence and real-time data sharing across the digital payments ecosystem to prevent and mitigate digital payment fraud. RBI also decided to introduce an e-mandate for FasTAG, national common mobility card (NCMC) and UPI Lite wallets to automatically replenish the balances if the balance goes below the threshold limit set by the customers.

RBI governor Shaktikanta Das says, "After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided by a four to two majority to keep the policy repo rate unchanged at 6.50%. The MPC also decided by a majority of four out of six members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target while supporting growth."

"On inflation, we are on the right track, but there is still work to be done. Globally, there are concerns that the last mile of disinflation might be protracted and arduous amidst continuing geopolitical conflicts, supply disruptions and commodity price volatility. In India, with growth holding firm, monetary policy has greater elbow room to pursue price stability to ensure that inflation aligns to the target on a durable basis. In its current setting, monetary policy remains squarely focused on price stability to effectively anchor inflation expectations and provide the required foundation for sustained growth over a period of time," he added.

While the MPC took note of the disinflation achieved so far without hurting growth, the RBI governor says it (MPC) remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation. "Hence, monetary policy must continue to remain disinflationary and be resolute in its commitment to aligning inflation to the target of 4.0% on a durable basis."

The forecast of a normal south-west monsoon by the India Meteorological Department (IMD) is expected to boost kharif production and replenish the reservoir levels. Strengthening agricultural sector activity is expected to boost rural consumption. On the other hand, RBI says sustained buoyancy in services activity should continue to support urban consumption.

The healthy balance sheets of banks and corporates, the government's continued thrust on capex, high capacity utilisation and business optimism augur well for investment activity. External demand should get a fillip from improving prospects of global trade. Taking all these factors into consideration, real GDP growth for FY24-25 is projected at 7.2% with the first quarter (Q1) growth at 7.3%, Q2 at 7.2%, Q3 at 7.3% and Q4 at 7.2%," the governor says.

Assuming a normal monsoon, RBI sees consumer price index (CPI) inflation for FY24-25 at 4.5%, with Q1 at 4.9%; Q2 at 3.8%; Q3 at 4.6% and Q4 at 4.5%.

Mr Das says, "According to our projections, the second quarter of FY24-25 is likely to see some correction in headline inflation, but this is likely to be a one-off on account of favourable base effects and may reverse in the third quarter. At the current juncture, the uncertainties related to the food price outlook warrant close monitoring, especially their spillover risks to headline inflation. In parallel, the behaviour of the core component also needs to be watched carefully. We need a descent of inflation to the 4% target on a durable basis while supporting growth."

In November last year, RBI flagged certain concerns about excessive growth in the unsecured retail loans and over-reliance of non-banking financial companies (NBFCs) on bank funding.

According to the RBI governor, recent data suggests some moderation in these loans and advances. He says, "We are closely monitoring the incoming data to ascertain if further measures are necessary. The boards and top management of regulated entities (REs) should ensure that risk limits and exposures for each line of business are kept well within their respective risk appetite framework. The persisting gap between credit and deposit growth rates warrants a rethink by the boards of banks to re-strategise their business plans. A prudent balance between assets and liabilities has to be maintained."

Mr Das also pointed out that few regulated entities still charge certain fees without proper disclosures in the key facts statement (KFS). "It has also been observed in some microfinance institutions and NBFCs that the interest rates on small-value loans are high and appear to be usurious. The regulatory freedom enjoyed by the REs with respect to interest rates and charges should be used judiciously to ensure fair and transparent pricing of products and services," he added.

According to Dharmakirti Joshi, chief economist at CRISIL, the US Federal Reserve has elbow room to pursue tight monetary policy because growth in that country is robust, while Europe is on the other side, with growth concerns amid elevated inflation. "The RBI, too, has policy space to keep rates higher and rein in CPI inflation to its stated goal of about 4%."

"Food continues to drive the gauge in India - food inflation was 8.7% in April, while non-food was a subdued 2.4%. Our base case is a normal monsoon, trimming the headline to 4.5%. The RBI has kept its inflation forecast unchanged at 4.5% this fiscal year. However, it remains more optimistic about growth, revising GDP growth by 20bps (basis points) to 7.2%. CRISIL's estimate is a tad lower at 6.8%. We now see the RBI cutting rates starting October and have lowered our expectation to two rate cuts against three foreseen earlier," he added.

Commenting on the RBI policy decision, Anuj Puri, chairman of ANAROCK group feels that with unchanged borrowing costs, both developers and homebuyers benefit from increased market confidence and predictability.

He says policy continuity supports sustained demand in the mid-range and premium property segments. However, he points out that the affordable housing sector is most cost-sensitive. "While Pradhan Mantri Awas Yojana (PMAY) for urban (area) has sanctioned 118.64 lakh homes against a demand of 112.24 lakh homes, affordable housing (homes priced under Rs40 lakh) sales in Q1 of 2024 recorded 26,545 units - a mere 20% of the total sales. However, as we have seen, unchanged home loan rates alone are insufficient to induce new vibrancy in the affordable segment. It is hoped that the government will soon introduce further incentives to support it."

Here are the additional measures announced by the RBI governor...

Review of Limit of Bulk Deposits in Banks
On a review of the bulk deposit limit, it is proposed to revise the definition of bulk deposits as 'single rupee term deposit of Rs3 crore and above' for scheduled commercial banks (SCBs) (excluding regional rural banks-RRBs) and small finance banks (SFBs). Further, it is also proposed to define the bulk deposit limit for local area banks as 'single rupee term deposits of Rs1 crore and above', as applicable in the case of RRBs.

Rationalisation of Guidelines for Export and Import of Goods and Services under Foreign Exchange Management Act (FEMA), 1999
In view of the changing dynamics of international trade and in line with the progressive liberalisation of foreign exchange regulations, it is proposed to rationalise the extant FEMA guidelines on the export and import of goods and services. This will further promote ease of doing business and provide greater operational flexibility to authorised dealer banks. Draft guidelines will be issued shortly for stakeholder feedback.

Setting up a Digital Payments Intelligence Platform
RBI says it has taken a number of measures over the years to deepen digital payments while ensuring their safety and security. These measures have boosted consumer confidence. However, growing instances of digital payment frauds highlight the need for a system-wide approach to prevent and mitigate such frauds. It is, therefore, proposed to establish a digital payments intelligence platform for network-level intelligence and real-time data sharing across the digital payments ecosystem. To take this initiative forward, RBI has constituted a committee to examine various aspects of setting up the Platform.

Inclusion of Recurring Payments with Auto-Replenishment Facility under the e-mandate Framework
The adoption of e-mandates for recurring payment transactions has been increasing. It is now proposed to include payments, such as replenishment of balances in FASTag, and national common mobility card (NCMC), which are recurring in nature but without any fixed periodicity, in the e-mandate framework. This will enable customers to automatically replenish the balances in Fastag, and NCMC if the balance goes below the threshold limit set by them. This will enhance convenience in making travel and mobility related payments.

Introduction of Auto-Replenishment of UPI Lite Wallet - Inclusion under the e-mandate Framework
UPI Lite was introduced in September 2022 to enable small value payments in a quick and seamless manner through an on-device wallet. To encourage wider adoption of UPI Lite, it is now proposed to bring it under the e-mandate framework by introducing a facility for customers to automatically replenish their UPI Lite wallets if the balance goes below the threshold limit set by them. This will further enhance the ease of making small value digital payments.

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