The Reserve Bank of India (RBI) on September 30 announced a 50 basis points hike in the repo rate stepping up its fight against persistently high inflation. The Monetary Policy Committee (MPC) began its three-day meeting on September 28. The 50 bps increase in the repo rate this week is the fourth consecutive one since May.
Announcing the policy decision, RBI Governor Shaktikanta Das highlighted the worry of the rate-setting panel on inflation and said the central bank is watching the price situation closely. The Governor said "In the last two and half years, the world has witnessed two major shocks – the COVID-19 pandemic and the conflict in Ukraine. These shocks have produced profound impact on the global economy. As if that was not enough, now we are in the midst of a third major shock – a storm – arising from aggressive monetary policy actions and even more aggressive communication from Advanced Economy (AE) central banks." The recent sharp rate hikes and forward guidance about further big rate hikes have caused tightening of financial conditions, extreme volatility and risk aversion. All segments of the financial market including equity, bond and currency markets are in turmoil across countries. There is nervousness in financial markets with potential consequences for the real economy and financial stability. The global economy is in the eye of a new storm. “Emerging market economies are confronted with challenges of slowing global growth, elevated food and energy prices, spillovers from advanced economy policies, debt distress and sharp currency depreciation,” he said.
The Governor added "Despite this unsettling global environment, the Indian economy continues to be resilient. There is macroeconomic stability. The financial system remains intact, with improved performance parameters. The country has withstood the shocks from COVID-19 and the conflict in Ukraine."
The Monetary Policy Committee (MPC) met on 28th, 29th and 30th September 2022. Based on an assessment of the macroeconomic situation and its outlook, the MPC decided by a majority of five members out of six:
- to increase the policy repo rate by 50 basis points to 5.9 per cent, with immediate effect.
- Consequently, the standing deposit facility (SDF) rate stands adjusted to 5.65 per cent; and
- the marginal standing facility (MSF) rate and the Bank Rate to 6.15 per cent.
- The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
Here are the key highlights of the RBI's Monetary Policy Committee meet today:
Policy Rates Revision
- RBI hikes repo rate by 50 basis points to 5.9%
- In the last five months, RBI has already increased the Repo Rate by 190 bps (It was 4% In April & it’s 5.90% now).
Repo Rate History.xlsx
RBI Repo Rate Cut History 2022 -2019 (Pre Covid Level) The change in repo rate in India since October 2019 (Pre Covid Level) can be summed up as follows: Effective Date Repo Rate %Change 2022-09-30 5.90% 0.50 2022-08-05 5.40% 0.50 2022-06-08 4.90% 0.50 2022-05-01 4.40% 0.40 2020-10-09 4.00% 0 2020-08-06 4.00% 0 2020-05-22 4.00% 0.40 2020-03-27 4.40% 0.75 2020-02-06 5.15% 0.25 07 August, 2019 (Pre Covid Level) 5.40% 0.35 06 June, 2019 (Pre Covid Level) 5.75% 0.25
- Standing Deposit Facility(SDF) rate stands adjusted to 5.65%
- MSF(Marginal Standing Facility) & bank rate adjusted to 6.15% from 5.65%
- MPC decided to remain focused on withdrawal of accommodation to ensure inflation remains within target going forward, supporting growth: RBI
- 28-day variable rate reverse repo rate (VRRR) auction merged with 14-day VRRR auction to counter temporary moderation in liquidity
- The Reserve Bank uses the VRRR auctions of longer maturity to balance out surplus liquidity in the system.
- Rupee has fallen 7.4% vs dollar from April
- Rupee has depreciated in an orderly manner
- It has fared much better than several other currencies. It depreciated only 7.4% this year till September 28
- Rupee is a free floating currency, RBI does not have a fixed exchange rate for rupee; It intervenes in market only to curb excessive volatility: Das
- About 67% decline in FY23 Foreign exchange reserves due to valuation changes resulting from dollar appreciation, said RBI Guv. He added, "there was accretion of $4.6 billion to the dollar reserves during the current financial year.
- RBI has been judicious in its intervention in the forex market: Das
- Confident of meeting the external financing requirements: Das
- India's external debt-to-GDP ratio remains one of the lowest across the world: Das
On GDP growth:
- RBI lowers India’s FY23 Real GDP growth from 7.2% to 7%. Q2 at 6.3%, Q3 is project to be at 4.6%, Q4 at 4.6% while Q1 FY24 real GDP Growth is projected to be at 7.3%.
- While the real GDP growth in the first quarter of this year turned out to be lower than expectations, nonetheless it was 13.5% & perhaps the highest among the major global economies: Shaktikanta Das
- High frequency data for the second quarter indicate that economic activity remains resilient, private consumption has been holding up... rural demand is also gaining gradually, investment demand picking up... agriculture sector remains resilient: RBI Governor Shaktikanta Das
- Indian economy remains resilient despite global headwinds wherein global recession fears are mounting, inflation high: Das
- Jan-March real GDP growth seen at 4.6%
- July-Sept real GDP growth seen at 6.3%; Oct-Dec real GDP growth seen at 4.6%
- Bank credit has grown at an accelerated pace of 16.2 per cent, said RBI Guv
- RBI’s CPI inflation forecasted retained at 6.7% for FY23. Inflation for Q2 is projected at 7.1%, Q3 at 6.5%, Q4 is project to be at 5.8% with risk evenly balanced.
- CPI remains elevated and above the upper tolerance band target. Recent correction in commodities including crude oil prices, if sustained, can ease pressure.
On forex reserves:
- Forex Reserve now stands at 537.5 Billion. 66% of the decline in reserve is due to valuation changes arising from appreciating USD and higher US bond Yields.
- In view of moderation in surplus liquidity, RBI decided to merge 28 day VRRR with 14 day VRRR. Only 14 day VRRR auction will be conducted.
On CAD and FPI’s:
- Current account deficit for 1st quarter of FY23 is pegged at 2.8% of GDP with trade deficit at 8.1% of GDP.
- India’s import growth is decelerating compared to export growth.
- FDI Improved to $18.9 Billion in April to July from $13.1 Billion last year.
- FPI has returned with $7.5 Billion after an outflow of 9 consecutive months
- India’s other external ratios have fared better than other developing countries
- External debt to GDP is lowest amongst growing economies
- Expected loss-based approach to be used for Banks
- Framework for securitization for stressed assets to be proposed
- RBI proposes to extend rules that apply online payment aggregators to offline payment aggregators as well, says Shaktikanta Das
- Regional Rural Banks (RRBs) are currently allowed to provide Internet Banking facilities to their customers, subject to fulfilment of certain criteria. Keeping in view the need to promote the spread of digital banking in rural areas, these criteria are being rationalised. The revised guidelines will be issued separately,
- RBI to issue a Discussion Paper on Expected Loss (EL) Based Approach for Loan Loss Provisioning by Banks.
- A Discussion Paper on Securitisation of Stressed Assets Framework (SSAF) is being issued for feedback from stakeholders
On Indian Economy
- 2 shocks have impacted global markets, now we are facing the 3rd shock. After two shocks of Covid-19 pandemic and the conflict in Ukraine, now we are in the midst of another shock, a storm, arising from aggressive monetary policies by the global central banks, Das said.
- We will do ‘whatever it takes to cool inflation that has not been in any mood to ease below 6%. Since the last meeting, price pressures have intensified again and India’s local currency has slumped to a nadir courtesy of an aggressive Fed that amplified the hawkish tone, says. RBI Governor and MPC Chair Shakitkanta Das.
- The central bank is trying hard to maintain a tight balance between controlling inflation on one hand and support the nascent economic growth recovery on the other hand. The government has tasked the central bank to ensure the consumer price index (CPI) remains at 4 per cent with a margin of 2 per cent on either side, but retail inflation has stubbornly stayed above the RBI's comfort zone since January .
The minutes of the MPC’s meeting will be published on October 14, 2022.
The next meeting of the MPC is scheduled during December 5-7, 2022.
MPC’s rationale for its decisions on the policy rate and the stance - Governor Shri ShaktiKanta Das Statement
The global economic outlook continues to be bleak. Financial conditions are tightening and recession fears are mounting. Inflation continues to persist at alarmingly high levels across jurisdictions. The enduring effects of the pandemic and the geo-political conflict are manifesting in demand-supply mismatches of goods and services. Central banks are charting new territory with aggressive rate hikes, even if it entails sacrificing growth in the near term. In this milieu, nervous investor sentiments have triggered a flight to safety. The US dollar has strengthened rapidly to a two-decade high. Several advanced and emerging market currencies are facing sharp depreciation pressures. Emerging market economies (EMEs), in particular, are confronted with challenges of slowing global growth, elevated food and energy prices, spillovers from advanced economy policy normalisation, debt distress and sharp currency depreciations.
Against this challenging global environment, economic activity in India remains stable. While real GDP growth in Q1:2022-23 turned out to be lower than our expectations, the late recovery in kharif sowing, the comfortable reservoir levels, improvement in capacity utilisation, buoyant bank credit expansion and government’s continued thrust on capital expenditure are expected to support aggregate demand and output in H2:2022-23.
Consumer price inflation remains elevated and above the upper tolerance band of the target due to large adverse supply shocks, some firming up of domestic demand, and the spillovers from global financial markets. The recent correction in global commodity prices including crude oil, if sustained, may ease cost pressures in the coming months. The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiments.
In this backdrop, the MPC was of the view that persistence of high inflation necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain the second-round effects. This action will support medium-term growth prospects. Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 5.9 per cent and to remain focused on withdrawal of accommodation, while supporting growth.
Let me step back and elaborate on our monetary policy stance. Monetary policy had moved from neutral to accommodative stance in June 2019. At that time, the repo rate was 5.75 per cent; headline CPI inflation was hovering around 3 per cent and was expected to be in the range of 3.4 to 3.7 per cent in H2:2019-20; and, liquidity was in deficit mode, with an average daily net injection of ₹0.3 lakh crore in May 2019 under the liquidity adjustment facility (LAF). Today, inflation is hovering around 7 per cent and we expect it to remain elevated at around 6 per cent in H2:2022-23. Liquidity remains surplus, with average daily net absorption of ₹1.1 lakh crore under the LAF in September 2022 (up to September 28). As government expenditure picks up on the back of high GST and direct tax collections, the system liquidity will go up further. Thus, even as the nominal policy repo rate has been raised by 190 basis points so far (including today’s increase), the policy rate adjusted for inflation trails the 2019 levels. The overall monetary and liquidity conditions, therefore, remain accommodative and hence, the MPC decided to remain focused on withdrawal of accommodation.
Source: rbi.org.in , Economic Times, Bloomberg, News 18 & www.indiainfoline.com & https://www.businesstoday.in/latest/economy/story/why-is-the-us-dollar-rising-and-rupee-declining-ex-cea-k-subramanian-explains-348241-2022-09-26