RBI’s Bi-monthly Review dt. 7th December 2022 – Key Takeaways and Highlights of the Policy

The Monetary Policy Committee (MPC) met on 5th, 6th and 7th December 2022. Based on an assessment of the macroeconomic situation and its outlook, the MPC decided by a majority of 5 members out of 6 to increase the policy repo rate by 35 basis points to 6.25 per cent, with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.00 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent. The MPC also decided by a majority of 4 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

RBI Governor said "In this hostile international environment, the Indian economy remains resilient, drawing strength from its macroeconomic fundamentals. Our financial system remains robust and stable. Banks and corporates are healthier than before the crisis. Bank credit is growing in double digits for 8 months now. India is widely seen as a bright spot in an otherwise gloomy world."

Here are the Key Takeaways & highlights of the RBI MPC announcement on December 7  of the RBI governor’s speech:

— Repo rate increased by 35 bps to 6.25%

The MPC voted 5-1 to increase the repo rate by 35 basis points to 6.25 percent.

Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to increase the policy repo rate by 35 basis points. Prof. Jayanth R. Varma voted against the repo rate hike.

The Standing Deposit Facility rate and Marginal Standing Facility (MSF) rate were also increased by 35 bps each to 6 percent and 6.5 percent, respectively.

— Stance focused on ‘withdrawal of accommodation’

Das said the MPC voted 4-2 to remain focused on withdrawal of accommodation so that inflation remains within the target while supporting growth.

On balance, MPC was of the view that further calibrated action was warranted to keep inflation expectations anchored, break core inflation persistence and contain second-round effects.

Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Dr. Ashima Goyal and Prof. Jayanth R. Varma voted against this part of the resolution.

Adjusted for inflation, policy rate remains accommodative. Inflation is expected to be above 4 percent in the next 12 months.

— Economic activity continues to gain strength

Economic activity continued to gain strength in October. Tractor and two-wheeler sales suggest rural demand is recovering, Das said. Drag from net external demand was further accentuated in October but the agriculture sector remained resilient, he said.

“Manufacturing, services PMI for India in November among the highest in the world. Going ahead, investment activity will get support from government capex. RBI surveys show consumer confidence has further improved. Manufacturing and infrastructure firms are optimistic about the outlook,” the RBI governor added.

— GDP growth forecast for FY23 lowered to 6.8%

The MPC lowered the GDP growth forecast for FY23 to 6.8 percent from 7 percent. The GDP growth forecast for October-December 2022 was lowered to 4.4 percent from 4.6 percent. For January-March 2023, it was reduced to 4.2 percent from 4.6 percent, for April-June 2023 it was lowered to 7.1 percent from 7.2 percent and for July-September 2023, it is projected at 5.9 percent.

According to the latest data released by National Statistical Office (NSO), real gross domestic product (GDP) posted a growth of 6.3 per cent year-on-year (y-o-y) in Q2:2022-23, driven primarily by private consumption and investment.

— CPI inflation forecast retained at 6.7%

CPI inflation forecast for FY23 has been retained at 6.7 percent. CPI inflation forecast for October-December 2022 was raised to 6.6 percent from 6.5 percent and for January-March 2023 to 5.9 percent from 5.8 percent.

Das said the battle against inflation was not over. The CPI inflation forecast for April-June 2023 has been retained at 5 percent, while for July-September it is seen at 5.4 percent.

— Liquidity conditions likely to improve

Das was optimistic that the liquidity conditions would likely improve. “We will look for durable signs for turn in liquidity cycle for infusing liquidity. The RBI remains nimble and flexible in its liquidity management operations,” he said.

The governor said though the RBI was in an absorption mode, it was ready to conduct LAF operations that inject liquidity as may be needed. “We will look for a durable sign of a turn in the liquidity cycle. Market participants must wean themselves away from overhang of liquidity surpluses,” he added.

The pace of transmission of monetary policy actions to lending and deposit rates has quickened in the current tightening phase, beginning May 2022. The weighted average lending rates (WALRs) on fresh and outstanding rupee loans have increased by 117 bps and 63 bps, respectively, during the period May to October 2022. On the deposit side, the weighted average domestic term deposit rate on fresh and outstanding deposits increased by 150 bps and 46 bps, respectively, during the same period

— Impact on the rupee

The appreciation of the US dollar this year, which precipitated large scale depreciation of all major global currencies including the Indian rupee (INR), has drawn wide attention. Through this episode of US dollar appreciation, the INR’s movements have been the least disruptive, relative to peers. In fact, the INR has appreciated against all other major currencies except a few Barring the Swiss franc, the Canadian dollar, the Singapore dollar, the Russian ruble etc. Mr. Das said the Indian rupee appreciated 3.2 percent during April-October in real terms, even as major currencies depreciated. “The rupee should be allowed to find its level,” he added. On a financial year basis (i.e., from April 2022 to October 2022), the INR has appreciated by 3.2 per cent in real terms.

— On forex and exports

The Governor said slowing external demand was weighing on India’s merchandise exports but the size of forex reserves “is comfortable and has increased”.

“Forex reserves stand at $561.2 billion as on December 2. Meanwhile, FDI inflows rose to $22.7 billion in April to October 2022 from $21.3 billion in the corresponding period last year,” he added.

The governor also announced that:

— The RBI will restore normal market hours of 9am-5pm for Call, CP, CD market

— The dispensation of enhanced HTM limit of 23 percent for banks extended up to March 2024

— Banks’ HTM limits will be restored to 19.5 percent from 23 percent in a phased manner starting April-June 2024

Enhancing the Mandates of Unified Payments Interface (UPI) - The capabilities in UPI will be further enhanced by introducing single-block-and-multiple-debits functionality. This facility will enable a customer to block funds in his/her account for specific purposes, which can be debited whenever needed. This will significantly enhance the ease of making payments for investments in securities including through the Retail Direct platform as well as e-commerce transactions.

Expanding the Scope of Bharat Bill Payment System (BBPS) - The scope of BBPS is being enhanced to include all categories of payments and collections, both recurring and non-recurring, and for all category of billers (businesses and individuals). This will make the BBPS platform accessible to a wider set of individuals and businesses who can benefit from the transparent payments experience, faster access to funds and improved efficiency.

Hedging of Gold in the International Financial Services Centre (IFSC) - Resident entities in India are currently not permitted to hedge their exposure to gold price risk in overseas markets. With a view to providing greater flexibility to these entities to hedge the price risk of their gold exposures, resident entities will now be permitted to hedge their gold price risk on recognised exchanges in the IFSC. This measure will benefit importers/exporters of gold such as jewellers and industries which use gold as an intermediate or raw material.

The minutes of the MPC’s meeting will be published on December 21, 2022.

The next meeting of the MPC is scheduled during February 6-8, 2023.

MPC’s rationale behind these decisions on the policy rate and the stance:

Growth prospects across the world are dampening & Financial markets remain nervous and are characterised by high volatility and price swings.

The Indian economy, the outlook is supported by good progress of rabi sowing, sustained urban demand, improving rural demand, a pick-up in manufacturing, rebound in services and robust credit expansion. Consumer price inflation moderated to 6.8 per cent (y-o-y) in October as expected, but it still remains above the upper tolerance band of the target. Core inflation is exhibiting stickiness. While headline inflation may ease through the rest of the year and Q1:2023-24, it is expected to rule above the target. The medium-term inflation outlook is exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions.

The MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. These actions will strengthen the medium-term growth prospects of the Indian economy. Accordingly, the MPC decided to increase the policy repo rate by 35 basis points to 6.25 per cent and to remain focused on withdrawal of accommodation, while supporting growth.

As regards the stance of monetary policy, the MPC took a holistic view of the policy rate and liquidity conditions relative to inflation. Adjusted for inflation, the policy rate still remains accommodative. Over the next 12 months, inflation is expected to remain higher than the 4 per cent target. System liquidity remains in surplus with an average daily absorption under the liquidity adjustment facility (LAF) of ₹1.6 lakh crore in November 2022. Since then, it has gone up to ₹2.6 lakh crore as on 5th December. The overall monetary and liquidity conditions remain accommodative and hence, the MPC decided to remain focused on withdrawal of accommodation.

Please click here to read the full : Governors’ Statement: December 7, 2022  & Monetary Policy Statement, 2022-23 Resolution of the Monetary Policy Committee (MPC) December 5-7, 2022

Summary of MPC Announcements made by Governor Shaktikanta Das
- RBI MPC increases repo rate by 35 basis points to 6.25 percent
- MPC voted to remain focused on withdrawal of accommodation
- Inflation expected to be above 4 percent in the next 12 months
- GDP growth forecast for FY23 lowered to 6.8 percent from 7 percent
- CPI inflation forecast for FY23 retained at 6.7 percent

What experts have said about the policy announcement:

Vivek Iyer, partner at Grant Thornton Bharat:

"Given the second-order effects of exchange rates on inflation, we expect continued intervention in the exchange rate market by the RBI, to keep the exchange rates within a band."

Manish P Hingar, founder at Fintoo:

"The tone is slightly hawkish. We believe that 6.25 per cent could be the terminal rate for now. Real estate stock may react as EMIs are expected to rise."

Utkarsh Sinha, managing director of Bexley advisors

"...the RBI's decision to continue with modest hikes is perhaps wise, as long as there is effective communication to the economy about the direction it is meant to be headed and a foreseeable end-point is identified."

Divam Sharma, co-founder of Green Portfolio:

"RBI's stance is assured while being cautious. The banking sector should continue to benefit from the robust margins and continuing credit growth from retail as well as corporates. The rate hike is broadly on the expected lines. This should be a status quo announcement for the markets. Markets will now take lead from the US Fed verdict in the coming week."

Jyoti Prakash Gadia, managing director at Resurgent India:

"Availability of adequate liquidity for the productive sector of the economy has been assured by RBI which augurs well for the stock market, which is now seeing new major entrants and continued foreign inflow. The extension of time for HTM categorisation of fresh Bank investments in bonds till March 2024, paves the way for stability in the bond market/Financial sector and future Government Borrowing. Overall pragmatic revisions of the monetary policy by RBI considering the uncertainties and volatility both at domestic and international fronts."

Anil Rego, founder and fund manager at Right Horizons:

"RBI commentary and announcement is mostly in line with street expectations and thus we don't see any material impact on the economy from RBI rate hike decision. Inflation is expected to be around 5 per cent in Q1FY24 and 5.4 per cent in Q2FY24, thus the repo rate is expected to peak around 6.7 per cent for this rate hike cycle."

Sonam Srivastava, founder at Wright Research:

"We see banks staying strong with this announcement as the interest income gets stronger with the rate hike. There is concern about the export sector given the slowdown in the global economy and consumer sectors to remain robust as rural demand is seen increasing and inflation moderating."

Ramani Sastri, chairman & MD at Sterling Developers:

"Low-interest rates have been the biggest factor in the resurgence of real estate demand in the last few years and hence the rate hike would mean a hurdle in affordability. However, there is a positive sentiment, as affordability and disposable incomes of new-age homebuyers are much better than in the past."

Lincoln Bennet Rodrigues, chairman & founder, The Bennet and Bernard Company:

"We believe the positive sentiment will continue in the luxury segment driven by changes in buying patterns post the pandemic. However, a reduction in the key rates going forward would be widely celebrated as low-interest rates have been a crucial factor in the revival of overall real estate demand and improvement in the liquidity situation which is vital for the sector."

Source: rbi.org.in, Moneycontrol.com, Economic times, Business Standard


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