RBI Monetary Policy Highlights : RBI MPC keeps repo rate unchanged at 6.5%

The Reserve Bank of India has increased the existing limit for gold loans under the Bullet Repayment Scheme to ₹4 lakh from ₹2 lakh in respect of Urban Co-operative Banks who have met the overall target and sub-targets under Priority Sector Lending as of March-end.

RBI permitted bullet repayment of gold loans up to ₹1 lakh to start with (in 2007), which was increased later (in 2014) to ₹2 lakh, with the repayment being restricted to 12 months. Read more.

RBI Governor Shaktikanta Das has said it is desirable that banks having surplus funds explore lending opportunities in the interbank call money market, rather than parking funds in SDF (standing deposit facility) at relatively less attractive rates.

Das underscored that elevated levels of MSF (marginal standing facility) borrowings amidst substantial funds parked under the SDF is symptomatic of skewed liquidity distribution in the banking system. Read more.

RBI has extended the Payments Infrastructure Development Fund (PIDF) scheme by another two years till December 31, 2025. It will now include beneficiaries of the PM Vishwakarma scheme.

“The decision to expand the targeted beneficiaries under the PIDF scheme will provide a fillip to the Reserve Bank’s efforts towards promoting digital transactions at the grassroots level,” it said. Read more.

The RBI will introduce the facility for creation of card-on-file tokenisation at the issuer bank level to enhance convenience for cardholders in getting tokens created and linking them to their existing accounts with e-commerce applications.

“Given the growing acceptance and benefits of tokenisation of card data, it is now proposed to introduce Card-on-File Tokenisation (CoFT) creation facilities directly at the issuer bank level,” Governor Shaktikanta Das said. Read more.

RBI has allowed NBFCs classified as middle and base layer entities, to utilise credit risk mitigation tools to offset their exposure with eligible credit risk transfer instruments.

The step has been taken to harmonise norms across NBFCs; currently, upper layer NBFCS under the Large Exposures Framework, are permitted to use Credit Risk Mitigation (CRM) instruments to reduce their exposure to a counterparty.

“With a view to harmonise credit concentration norms among NBFCs, it has been decided to permit NBFCs in the Middle and Base Layers also to use CRM instruments to reduce their counterparty exposure under the credit concentration norms,” Governor Shaktikanta Das said in his statement on Friday. Read more.

The RBI reiterated caution and the current policy narrative is still more hinged to inflation uncertainty and liquidity management than on the fluid and uncertain global narrative as markets reprice ‘higher-for-longer’.

As global financial conditions transmit with a lag, there could be further volatility ahead. Even as domestic inflation is likely to meet policy targets by end-FY24, elevated DM rates and record-low interest differentials pose a headwind for the RBI.

Amid the changing external dynamics, the policy prerogative would ensure financial stability, which may possibly even precede inflation management in coming months.

Even as food inflation and core inflation had been moderating, the RBI rightly desisted from providing any dovish bent to the policy communication.

There is a clear reverberation of the previous policy – that the RBI will only be happy if they are able to hit the 4% mark on inflation on a durable basis. And, for now, this seems to be eluding as the RBI themselves have forecasted inflation for the year at 5.4%, with even the Q1 of the next financial year being higher at 5.2%.

Given that excess liquidity could be inflationary and can pose risks to financial stability, the RBI has started deploying policy tools from the August policy to remove the excess liquidity from the system. Unexpected by all, the RBI announces that OMO sales also becomes a policy tool for the future in its efforts to suck out liquidity.

This is important even from a longer perspective, given that India could be expecting large FX flows in FY25 on the back of JPM bond index inclusion.

Given the pulls and pressures on liquidity conditions in the coming months, the RBI did not announce any durable liquidity absorption measures for now (like CRR hike). However, it signalled that if required, they are open to the option of conducting OMO sales to manage liquidity conditions.

This signals the RBI’s preference for tighter liquidity conditions going forward driven both by inflation risks and financial stability concerns as liquidity tightens globally. This also aligns with the central bank’s reiteration that they want to anchor inflation at 4% and keeping it below the upper band of the target range (at 6%) is not enough.

10-year yield is likely to trade higher with the door being opened for OMO sales. Moreover, elevated US yields could also continue to exert pressure in the near-term. For macro indicators, we expect September inflation print at 5.3% and full year to average at 5.4%.

Household savings up from 4.2% in Q1 to 7% in Q2 FY24, he added.

Rs 2000 notes can be sent to RBI issue offices across 19 states after tomorrow. This can also be done through Post Office, he added.

It is up to the banks to take cues and manage their liquidity according to their requirements, the Governor added.

India is reasonably insulated from global yields, he added. He further said that we are able to build forex reserves because CAD is comfortably financed.

Overall the governance standards of banks have improved, he added.

Intention is that banks, NBFCs strengthen internal risk processes and grow their portfolio sensibly, he added.

We are sensitising banks, NBFCs, SFBs, etc. that they have to be careful, the Governor added. Retail credit growth is an outlier kind of growth, says Dy Guv Swaminathan

Our liquidity management framework is robust, he added.

Forex reserves are sizeable, gives lot of confidence to market, he added. Remittances data shows strong trends in Q1, could be higher than year ago, D-G Michael Debabrata Patra said.

Govt spending will pick and will add liquidity in the system. It will be consistent with our monetary policy stance, he added.

There will be active liquidity management and OMO sales is one of the tools, he added.

At the moment transmission of rates is still incomplete, he added.

OMO announcement is nothing to do with bond index inclusion and it is part of domestic liquidity management. No calendar for OMOs now and will watch situation, he added.

Financial stability is fundamental to price stability and growth. Banks will be encouraged to lend in interbank call money market, he added.

Monetary policy needs to be actively disinflationary at the current juncture, he added.

Headline CPI inflation vulnerable to food price shocks, while inflation target is 4% and not 2-6%, the Governor reiterated.

The MPC policy had a hawkish undertone to it. The governor sounded cautious about inflation even though the full-year inflation projection was unchanged. The RBI kept the GDP growth projection for FY24 untouched as they await additional data points to comprehensively assess the evolving dynamics. Furthermore, the RBI remains watchful of the liquidity conditions and wants to ensure no build-up of surplus liquidity. Hence the governor announced that RBI would consider open market operation (OMO) sale of government securities to mop up excess liquidity as required. We expect the RBI to start its rate-cutting journey from the second quarter of next fiscal year as inflation edges closer to 4% target.

The RBI Governor mentioned that the pitch is turning and we will play the ball on merit. Today’s policy is like Kapil Dev Policy. It will manage liquidity, inflation, growth, rupee and financial sector stability in an appropriate equilibrium like a legendary all-rounder Kapil Dev managed bowling, batting, fielding and captain ship.

The RBI has worked hard to create a balance between growth and inflation setting an example for rest of the world. This policy continues to take that hard work forward.

On a positive note, interest rates haven’t increased as anticipated, however they are expected to remain elevated for an extended period. This will have an implication on rate-sensitive sectors like banking, auto, core industries, and heavy-weighted balance sheet companies. The elevated global bond yields and appreciation of the US dollar will affect the domestic economy and capital flows. However, it should not have a deep overhang effect on the economy but rather a mixed bias in the short term.

The MPC, on expected lines, delivered a status quo policy both on rates and stance. We expect the MPC to maintain a prolonged pause while using liquidity tools more frequently to manage the stance given the volatile global environment.

The unchanged repo rate is a festive bonanza for homebuyers and gives them yet another opportunity to make cost-optimized home purchases.

If we consider the present trends, the overall consumer market looks bullish across sectors, particularly the automobile and housing markets, which in many ways reflect the health of the economy.

We are entering the festive quarter with a very strong momentum in housing sales, and unchanged interest rates will act as a major catalyst for growth in the residential market.

The fourth pause in policy rate augurs well for the real estate sector, especially residential as the sustained affordability is reflected in the growing sales momentum. Residential sales for the first nine months of 2023 have already touched 91% of the annual sales of 2022.

The synergy between steady interest rates and the ongoing festive season sentiment will lead to sales clearly outpacing last year’s numbers to a new high.

We would like to reiterate that inflation target is 4%, not 2-6%, the Governor added.

Payments infrastructure development scheme (PIDF) enabled over 2.66 cr payment touch points. This will cover recently launched to cover PM Vishwakarma scheme, the Governor added. He further said that the RBI will deploy emerging modes of payments acceptance. Read more.

To issue draft omnibus framework for recognising SROs for various categories of regulated entities. SROs can help in enforcing compliance culture, he added.

Inflows under ECBs saw a turnaround in FY24 so far. ECB net inflows at $4.5 bln in Apr-Aug vs net outflows of $3.2 bln year ago. Around 60% of ECBs are for capex requirements, the Governor added.

Address any risks and introduce suitable safeguards for robust risk management and stronger underwriting, the Governor added.

Banks credit growth is broad-based. RBI is closely monitoring sharp growth is some personal loan categories. Banks and NBFCs are advised to strengthen surveillance. Need of the hour is strong risk management, the Governor added.

Desirable for banks having surplus funds to explore lending funds in call money rather than passively parking in SDF, the Governor added. RBI May explore OMO sale to manage liquidity, he said.

Liquidity distribution in banking system skewed. Excessive liquidity can pose risks to price and financial stability. Moderation in excess liquidity led to more recourse to marginal standing facility, the Governor said.

MPC policy has to be ready to take timely and appropriate action to prevent spillovers from food and fuel price shocks to underlying inflation print and inflation expectations, he added.

Underlying inflation pressures are easing. But throughout much of third quarter food inflation may not easing, he added.

Whereas July-Sep inflation seen at 6.4%, versus 6.2% projected earlier, the Governor added. Oct-Dec CPI inflation seen at 5.6% versus 5.7% earlier and Jan-March CPI inflation seen at 5.2%, unchanged from earlier, he said. Read more.

Sustained pressure in pulses, cereals, spices added to food inflation, he added. The Governor further said that near-term inflation expected to soften future trajectory will depend on number of factors including depend supply mismatch in spice, Elnino Conditions and global food and energy crisis.

Jan-March real GDP growth seen at 5.7%, unchanged from earlier projection, the Governor added. Similarly, April-June FY25 real GDP growth seen at 6.6%, unchanged from earlier.

Transmission of 250 bps to bank lending rate still work in progress, the Governor added.

The RBI Monetary Policy Committee has kept the key policy repo rate unchanged at 6.5%. This is the fourth meeting on the trot that the MPC decided to maintain the status quo on the repo rate. The MPC last raised this rate from 6.25 per cent to 6.50 per cent at its meeting in February 2023. MPC voted unanimously to keep the poliyc rate at 6.5%, says RBI Governor Shaktikanta Das. Read more.

The policy mix we have prusued has fostered macro economic stability, says RBI Governor Shaktikanta Das

The rupee appreciated by 4 paise to 83.21 against the US dollar in early trade on Friday on positive cues from the equity market ahead of the RBI’s interest rate decision.

Selling pressure from foreign equity investors amid strengthening dollar resulted in a negative bias, according to forex traders.

At the interbank foreign exchange, the domestic unit opened at 83.21 against the dollar and then reached the 83.22 level, before touching 83.21 again. This was a gain of 4 paise against the closing level of 83.25 on Thursday. (PTI)

Indian shares are set to open higher, driven by the global equities’ upward trend, easing U.S. yields, and cooling crude prices.

The Reserve Bank of India (RBI) is expected to keep key rates unchanged in its monetary policy decision. The RBI’s decision, to be announced at 10:00 a.m., is anticipated to provide insight into the domestic economic recovery and inflation trajectory amid recent volatility in crude prices.

This fiscal year’s pause in rate hikes has contributed to a 12.59% rise in the benchmark Nifty 50, while falling crude prices benefit Indian importers.

On the investment front, foreign institutional investors continued to sell shares, while domestic institutional investors made purchases.

The Indian rupee is likely to open slightly higher on Friday, following a further pullback on the dollar index ahead of the U.S. non-farm payrolls report.

Traders are also eyeing the Reserve Bank of India’s monetary policy decision and commentary.

Non-deliverable forwards indicate the rupee will open at around 83.21-83.22 to the U.S. dollar, compared with its previous close of 83.25.

The dollar index dropped below 106.50 on Thursday, slipping further away from year-to-date highs. The pullback was attributed to profit taking before the U.S. September jobs report. - Reuters

Indian government bond yields are expected to remain largely unchanged in the opening session on Friday as market participants await the Reserve Bank of India’s monetary policy decision and commentary for further cues.

The 10-year benchmark 7.18% 2033 bond yield is likely to be in the 7.19%-7.23% range till the monetary policy decision after ending at 7.2140% in the previous session, a trader with a private bank said.

“With the two major global factors - oil and U.S. yields taken care of for the time being, the whole focus would be on the central bank’s policy decision as well as guidance on liquidity and inflation,” the trader said.

The central bank is seen holding the key interest rate steady at 6.50% on Friday, with the focus remaining on the inflation trajectory, as well as the liquidity outlook. - Reuters

Vice-Chairman and MD of Titagarh Rail Systems, Umesh Chowdhury, said: “The government’s policies and capital spending have fuelled infrastructure growth. There are a lot of opportunities for the manufacturing sector, which means the private sector will have to incur capital expenditure. For that, the interest rate regime will continue to play a very important role.”

Retail inflation jumped to a 15-month high of 7.44 per cent in July, as prices of vegetables and other food items spiked, according to offi\u008fcial data.

Chief Economist of Bandhan Bank, Siddhartha Sanyal,said: The global macroeconomic backdrop remains complicated with uncertainties around growth. This will

prompt the MPC to stay watchful, with a likely guidance of rates to remain higher for longer.

The RBI is expected to retain the benchmark rate of 6.5 per cent in its latest bi-monthly monetary policy review amid infl\u009dation concerns and other global factors, according to experts.

The Monetary Policy Committee (MPC) headed by the RBI Governor Shaktikanta Das started its three-day meeting on Wednesday, and the policy review will be announced on Friday morning.

“I think that between the last MPC meeting in August and this time, infl\u009dation has gone up, growth remains strong while global factors

have turned a little adverse in the sense that the US Federal Reserve is still aggressive in its stance, which has led to hardening of yields. In this

situation, the central bank is expected to maintain a status quo on policy rates in the ensuing policy,” said Crisil Chief Economist, D Joshi.

“We expect the Reserve Bank of India’s Monetary Policy Committee (RBI MPC) to keep the REPO rate unchanged to remain supportive of growth. However, the central bank will likely maintain a precautionary stance because of the inflationary pressure arising from external factors such as rising crude prices and Indian currency, which is at an all-time low. A pause will be supportive of the real estate sector in maintaining its current momentum. With the last few revisions, the REPO rate has gone up by 250 BPS, resulting in 160bps hike in the base lending rate, with the last three revisions being completely passed on to the home buyers. This has started to impact housing demand, especially in the affordable segment. The mid segment too has seen growth moderating in the last few quarters. A further increase in the REPO rate could potentially dampen buyers’ sentiment and impact housing affordability.”

The six-member monetary policy committee (MPC) is likely to maintain status quo on the policy repo rate at its upcoming meeting to support growth impulses in the ongoing festive season even as it will turn watchful on the possibility of uneven monsoon and rising global crude oil price exerting inflationary pressures.

The MPC stood pat on the policy repo rate in all three meetings held in the current financial year so far. Currently, the repo rate (the interest at which banks and primary dealers borrow funds from RBI to overcome short-term liquidity mismatches) is at 6.50 per cent.

Madan Sabnavis, Chief Economist, Bank of Baroda, said: “The credit policy this time will most likely continue with the existing rate structure as well as policy stance

“…Inflation is still high at 6.8 per cent and while we do expect it to come down sharply in September and October, there is still some pessimism on Kharif output especially relating to pulses which has potential to push up prices further. But as the inflation trajectory is downwards a rate hike can be ruled out. ” ​Read more.​

India Ratings & Research (Ind-Ra) has revised retail inflation estimates up to 30 basis points upwards during the October-December (Q3 of FY24) and January-March (Q4 of FY24) quarters of the current fiscal. Earlier, S&P Global and the Reserve Bank of India (RBI) upped the estimate.

Data from the Petroleum Planning & Analysis Cell (PPAC) showed that crude oil prices for the Indian basket surged to $93.4 a barrel from $74.93 a barrel in June. Read more.

Following are the highlights of the bi-monthly monetary policy announced by the Reserve Bank Governor Shaktikanta Das on Aug 10, 2023.

• Reserve Bank of India (RBI) has retained key policy repo rate retained at 6.5 per cent. This is the third meeting on the trot that the MPC decided to maintain the status quo on the repo rate.
• RBI has maintained that the focus would be on withdrawal of accommodative policy stance to ensure that inflation progressively aligns with target, while supporting growth
• It has retained GDP growth projection for FY24 at 6.5 per cent
• RBI has marginally revised inflation forecast to 5.4 per cent. According to the central bank, spike in vegetable prices, led by tomatoes, may exert sizeable upside pressures on near-term inflation trajectory
• RBI will take steps to ensure greater transparency in interest rate reset of EMI-based floating interest loans. The borrowers to get options of switching to fixed rate loans or foreclosure of loans
• The Reserve Bank is planning to artificial intelligence (AI) in UPI payments. Near Field Communication (NFC) technology will be deployed in offline payments via in UPI-Lite
• RBI proposes to enhance transactions limits for small value digital payments to ₹500 from ₹200 in UPI Lite
• To absorb surplus liquidity generated by various factors, including return of ₹2000 notes to the banking system, RBI has asked banks to maintain an incremental Cash Reserve Ratio (ICRR) of 10 per cent on the increase in their deposits between May 19 and July 28.
• RBI Governor Shaktikanta Das has announced that the cash reserve ratio (CRR) remains unchanged at 4.5 per cent
• According to RBI projections, current account deficit to remain eminently manageable during FY24
• Next meeting of the RBI rate setting panel (MPC) will be held October 4-6.

Read more.

Fall in ​vegetable​ and ​edible oil​ prices pushed retail inflation based on Consumer Price Index (CPI) below 7 per cent in August to 6.8 per cent. It was 7.4 per cent in July. However, cereal prices are still high.

Experts do not see any change in policy repo rate next month when Monetary Policy Committee (MPC) will meet. This means interest rates on loan may not see any change for the time being. ​Read more​.