RBI’s Bi-Monthly Monetary Policy Review dt 8th February 2023 – Key Highlights
Reserve Bank of India (RBI) governor Shaktikanta Das on Wednesday 8th February 2023, made the central bank's first Monetary Policy statement of the year. Mr Das announced the decisions taken by the RBI's Monetary Policy Committee (MPC), which met for three days starting February 6th. Wednesday's MPC meeting is the last one for this fiscal.
The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) on Wednesday hiked the repo rate by 25 basis points to 6.50 per cent. The repo rate underwent a sixth straight hike, The repo rate is the rate at which the RBI lends to the banks. The reverse repo rate, on the other hand, was left unchanged at 3.35%.
Announcing the hike, RBI Governor Shaktikanta Das said the MPC decided to hike the policy rate by 25 bps to 6.5 per cent. As expected, there was a split in the rate hike decision with four members voting for the hike and two against.
MPC members decision: Who voted in favour and against?
Shashanka Bhide, Rajiv Ranjan, Michael Debabrata Patra and Shaktikanta Das voted to increase the policy repo rate by 25 basis points. Ashima Goyal and Jayanth R. Varma voted against the repo rate hike
Shashanka Bhide, Rajiv Ranjan, 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. Ashima Goyal and Jayanth R. Varma voted against this part of the resolution.
- RBI hikes repo rate by 25 bps to 6.5%
- 6th rate hike since May last year
- SDF will stand revised to 6.25%
- MSF rate will stand revised at 6.75%
*RBI maintains policy stance at withdrawal of accommodation
*Decision by a majority of 4:2
* RBI projects 6.4 pc economic growth for 2023-24, lower than 7 pc this fiscal
* Inflation to come down to 5.3 pc in 2023-24, from average of 6.5 pc this fiscal
* Inflation outlook clouded by protracted geopolitical tensions, rising commodity prices
* Indian economy resilient; higher rabi acreage, robust credit expansion, thrust on capex in Budget 2023-24 to support growth
* Current account deficit to moderate in Oct-March, from 3.3 pc in April-Sept this fiscal
* Foreign exchange reserves at USD 576.8 billion as on January 27, 2023, covers 9.4 months of projected imports for 2022-23
* Indian Rupee remained one of the least volatile currencies among its Asian peers in 2022 and this year
* All inbound travellers to India will be allowed to use UPI for their merchant payments
* Pilot for QR Code based Coin Vending Machine (QCVM) to be launched in 12 cities
* Next meeting of the monetary policy committee scheduled for April 3-6.
- FY23 inflation projected at 6.5%
- Inflation expected to average 5.6% in Jan-March FY23
- Inflation seen at 5.3% for FY24
- CPI inflation moderated 105 bps in Nov-Dec
- Real GDP growth FY24 seen 6.4%; Apr-Mar real GDP growth seen 7.8%
- Jul-Sep real GDP growth seen 6.2%
- Governor Das said that the CAD (Current account deficit) will moderate in second half of 2022-23
- Das said that Rural demand showing signs of improvement
- RBI to allow lending, borrowing of govt bonds
- RBI to extend UPI facility to inbound travellers for merchant payments
Historical Importance & Evolution of Monetary Policy
RBI governor while making his opening statement of the first Monetary Policy Statement of 2023 referred to the historical Importance of RBI( & evolution of Monetary Policy), which from being a Joint Stock Company, the Reserve Bank was brought into public ownership on January 1, 1949. Thus, 2023 marks the 75th year of public ownership of the Reserve Bank and its emergence as a national institution.
Evolution of Monetary Policy over this 75 years Period: RBI Governor expressed as under:
- In the two decades after independence, the Reserve Bank’s role was to support the credit needs of the economy under the five-year plans.
- The following two decades were characterized by bank nationalization in 1969, oil shocks, monetization of large budget deficits and sharp rise in money supply and inflation.
- Monetary targeting was adopted in the mid-1980s to contain growth in money supply and curb inflation pressures.
- Since the early 1990s, the Reserve Bank focused on market reforms and institution building.
- A multiple indicator approach was adopted in April 1998 under which a host of indicators were monitored for policy making.
- In the aftermath of the global financial crisis and the taper tantrum, as inflationary conditions worsened in India, flexible inflation targeting (FIT) was formally adopted in June 2016 to provide a credible nominal anchor for monetary policy.
- The primary objective of monetary policy under the FIT framework is to maintain price stability while keeping in mind the objective of growth.
- Coming to present times, the unprecedented events of the last three years have put to test monetary policy frameworks globally, and it calls for a deeper understanding of the structural changes in the global economy and inflation dynamics, and their implications for the conduct of monetary policy.
- In the current unsettled global environment, emerging market economies (EMEs) are facing sharp trade-offs between supporting economic activity and controlling inflation, while preserving policy credibility. The world is looking to India, now at the helm of G-20, to energise global partnership in several critical areas.
MPC’s rationale for these decisions on the policy rate and the stance:
The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent, though it still remains well above the target in major economies. The situation remains fluid and uncertain. Amidst these volatile global developments, the Indian economy remains resilient. Weak external demand and the uncertain global environment, however, would be a drag on domestic growth prospects. While inflation is expected to moderate in 2023-24, it is likely to rule above the 4 per cent target. The outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude oil prices. At the same time, economic activity in India is expected to hold up well. The rate hikes since May 2022 are still working their way through the system. On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects. Accordingly, the MPC decided to raise the policy repo rate by 25 basis points to 6.50 per cent. The MPC will continue to maintain strong vigil on the evolving inflation outlook so as to ensure that it remains within the tolerance band and progressively aligns with the target. The overall monetary conditions, therefore, remain accommodative and hence, the MPC decided to remain focused on withdrawal of accommodation.
Available data for Q3 and Q4:2022-23 indicate that economic activity in India remains resilient. Urban consumption demand has been firming up, driven by sustained recovery in discretionary spending, especially on services such as travel, tourism and hospitality. Passenger vehicle sales and domestic air passenger traffic posted robust year-on-year (y-o-y) growth. Domestic air passenger traffic crossed pre-pandemic levels for the first time in December 2022. Rural demand continues to show signs of improvement as tractor sales and two-wheeler sales expanded in December. Several high frequency indicators4 also point towards strengthening of activity. Investment activity continues to gain traction.
Investment activity continues to gain traction. Indicators of fixed investment – cement output; steel consumption; and production and import of capital goods – registered robust growth in November and December. In several sectors such as cement, steel, mining and chemicals, there are signs that additional capacity is being created in the private sector.
On the supply side, agricultural activity remains strong with good rabi sowing, higher reservoir levels, good soil moisture, favourable winter temperature and comfortable availability of fertilisers.5 PMI manufacturing and PMI services remained in expansion at 55.4 and 57.2 respectively, in January 2023.
The expected higher rabi output has improved the prospects of agriculture and rural demand. The sustained rebound in contact-intensive sectors should support urban consumption. Broad-based credit growth, improving capacity utilisation, government’s thrust on capital spending and infrastructure should bolster investment activity. According to our surveys, manufacturing, services and infrastructure sector firms are optimistic about the business outlook. On the other hand, protracted geopolitical tensions, tightening global financial conditions and slowing external demand may continue as downside risks to domestic output. Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.0 per cent; and Q4 at 5.8 per cent. The risks are evenly balanced.
Headline CPI inflation moderated by 105 basis points during November-December 2022 from its level of 6.8 per cent in October 2022. This was due to a softening in food inflation on the back of a sharp deflation in vegetable prices, which more than offset the inflationary pressures from cereals, protein-based food items and spices. As a result of this earlier than anticipated and steeper seasonal decline in vegetable prices, inflation for Q3:2022-23 has turned out to be lower than RBI projections. Core CPI inflation (i.e., CPI excluding food and fuel), however, remained elevated. The food inflation outlook will benefit from a likely bumper rabi harvest led by wheat and oilseeds. Mandi arrivals and kharif paddy procurement have been robust, resulting in improvement in buffer stocks of rice. All these developments augur favourably for the food inflation outlook in 2023-24. Considerable uncertainties remain on the likely trajectory of global commodity prices, including price of crude oil. Commodity prices may remain firm with the easing of COVID-19 related restrictions in some parts of the world. The ongoing pass-through of input costs, especially in services, could keep core inflation at elevated levels. The commitment to fiscal consolidation that has been carried forward in the Union Budget 2023-24 and the future trajectory of reducing the gross fiscal deficit will engender an environment of macroeconomic stability. This augurs well for the inflation outlook. Further, the low volatility of the Indian rupee relative to peer currencies limits the impact of imported price pressures and other global spillovers.
Taking into account these factors and assuming an average crude oil price (Indian basket) of US$ 95 per barrel, inflation is projected at 6.5 per cent in 2022-23, with Q4 at 5.7 per cent. On the assumption of a normal monsoon, CPI inflation is projected at 5.3 per cent for 2023-24, with Q1 at 5.0 per cent, Q2 at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.6 per cent. The risks are evenly balanced.
Liquidity and Financial Market Conditions
The overall liquidity remains in surplus, with average daily absorption under the LAF increasing to ₹1.6 lakh crore during December-January from an average of ₹1.4 lakh crore in October-November. On a y-o-y basis, money supply (M3) expanded by 9.8 per cent as on January 27, 2023, while non-food bank credit rose by 16.7 per cent. India’s foreign exchange reserves were placed at US$ 576.8 billion as on January 27, 2023.
In order to accord primacy to price stability over growth in April 2022 RBI instituted major reforms in the monetary policy operating procedure through the introduction of the standing deposit facility (SDF); RBI restored the width of the policy corridor to its pre-pandemic level; RBI raised the repo rate by 40 bps and the cash reserve ratio (CRR) by 50 bps in an off-cycle meeting in May; shifted the policy stance to focus on withdrawal of accommodation; continued the rate tightening cycle in every meeting of the MPC; and RBI adopted a nimble and flexible approach to liquidity management by conducting both variable rate reverse repo (VRRR) and variable rate repo (VRR) operations as per requirement. As a result of all these measures, the real policy rate has been nudged into positive territory; the banking system has moved out of the Chakravyuh of excess liquidity; inflation is moderating; and economic growth continues to be resilient.
The Reserve Bank will remain flexible and responsive towards meeting the productive requirements of the economy. RBI will conduct operations on either side of the LAF, depending on the evolving liquidity conditions. RBI decided to restore market hours for the Government Securities market to the pre-pandemic timing of 9 am to 5 pm. RBI proposed to permit lending and borrowing of G-secs. This will provide investors with an avenue to deploy their idle securities, enhance portfolio returns and facilitate wider participation. This measure will also add depth and liquidity to the G-sec market; aid efficient price discovery; and work towards a smooth completion of the market borrowing programme of the centre and states.
The pace of transmission of monetary policy actions to lending and deposit rates has strengthened in the current tightening cycle. The weighted average lending rates (WALR) on fresh rupee loans and outstanding loans increased by 137 bps and 80 bps respectively, during May to December 2022. The weighted average domestic term deposit rate on fresh deposits and outstanding deposits increased by 213 bps and 75 bps respectively.
The Indian Rupee has remained one of the least volatile currencies among its Asian peers in calendar year 2022 and continues to be so this year also.
The current account deficit (CAD) for the first half of 2022-23 stood at 3.3 per cent of GDP. The situation has shown improvement in Q3:2022-23 as imports moderated in the wake of lower commodity prices, resulting in narrowing of the merchandise trade deficit. Further, services exports rose by 24.9 per cent (y-o-y) in Q3:2022-23, driven by software, business and travel services. Global software and IT services spending is expected to remain strong in 2023. Remittance growth for India in H1 of 2022-23 was around 26 per cent – more than twice the World Bank’s projection for the year. This is likely to remain robust owing to better growth prospects of the Gulf countries. The net balance under services and remittances are expected to remain in large surplus, partly offsetting the trade deficit. The CAD is expected to moderate in H2:2022-23 and remain eminently manageable and within the parameters of viability.
On the financing side, net foreign direct investment (FDI) flows remain strong at US $ 22.3 billion during April-December 2022 (US$ 24.8 billion in the corresponding period last year). Foreign portfolio flows have shown signs of improvement with positive flows of US$ 8.5 billion during July to February 6, led by equity flows (foreign portfolio flows are, however, negative during the financial year so far). Net inflows under non-resident deposits increased to US$ 3.6 billion during April-November 2022 from US $ 2.6 billion a year ago, boosted by the Reserve Bank’s July 6th measures. Foreign exchange reserves have rebounded from US$ 524.5 billion on October 21, 2022 to US$ 576.8 billion as on January 27, 2023 covering around 9.4 months of projected imports for 2022-23. India’s external debt ratios are low by international standards
Additional Measures Announced by MPC
Penal Charges on Loans
At present, Regulated Entities (REs) are required to have a policy for levy of penal interest on advances. The REs, however, follow divergent practices on levying of such charges. In certain cases, these charges are founded to be excessive. To further enhance transparency, reasonableness and consumer protection, draft guidelines on levy of penal charges will be issued to obtain comments from stakeholders.
Climate Risk and Sustainable Finance
Recognising the importance of climate related financial risks which may have financial stability implications, the Reserve Bank had issued a Discussion Paper on Climate Risk and Sustainable Finance in July 2022. Based on the feedback received, it has been decided to issue guidelines for REs on
(i) a broad framework for acceptance of Green Deposits;
(ii) disclosure framework on Climate-related Financial Risks; and
(iii) guidance on Climate Scenario Analysis and Stress Testing.
Expanding the Scope of TReDS
For the benefit of MSMEs, the Reserve Bank had introduced a framework in 2014 to facilitate financing of their trade receivables through Trade Receivables Discounting System (TReDS). It is now proposed to expand the scope of TReDs by
(i) providing insurance facility for invoice financing;
(ii) permitting all entities/institutions undertaking factoring business to participate as financiers in TReDS; and
(iii) permitting re-discounting of invoices (that is, developing a secondary market in TReDS).
These measures are expected to improve the cash flows of the MSMEs.
Extending UPI for Inbound Travellers to India
UPI has become hugely popular for retail digital payments in India. It is now proposed to permit all inbound travellers to India to use UPI for their merchant payments (P2M) while they are in the country. To begin with, this facility will be extended to travellers from G-20 countries arriving at select international airports.
QR Code based Coin Vending Machine - Pilot project
The Reserve Bank of India will launch a pilot project on QR Code based Coin Vending Machine (QCVM) in 12 cities. These vending machines will dispense coins against debit to the customer’s account using UPI instead of physical tendering of banknotes. This will enhance the ease of accessibility to coins. Based on the learnings from the pilot, guidelines will be issued to banks to promote distribution of coins using these machines.
For reading Monetary Policy Concepts please click on the following link: Monetary Policy – Important Concepts
Source: Governor’s Statement: February 08, 2023 & Monetary Policy Statement, 2022-23 Resolution of the Monetary Policy Committee (MPC) February 6-8, 2023
Economic Times, Money Control, Live Mint, Hindustan Times etc., https://www.livemint.com/money/personal-finance/how-rbi-repo-rate-hike-may-impact-fixed-deposit-loan-real-estate-industries-11675847029526.html
RBI Governor on Adani Group : Indian banking sector, including NBFCs, continues to be resilient, strong: RBI Governor Shaktikanta Das on lenders' exposure to Adani Group, adding that RBI has made an assessment of lenders' exposure to Adani group firms; large exposure guidelines have been complied with by all banks.
Indian banking system much stronger to be affected by 'case like this':"The strength, size and the resilience of the Indian banking system now are much stronger and larger to be affected by a case like this," Das said without directly mentioning about the Adani Group
Opinion of Analysts on Monetary Policy:
Borrowing costs could be expensive: "With an MCLR rate of 8.4%, about 60% of the repo rate hike, so far, has already transmitted into the lending rates. Thus, the borrowing costs have significantly increased across the product categories including the housing sector. Post today’s rate hike, borrowing costs could be expensive by another 10 – 15 bps, on an immediate basis," said Shishir Baijal, Chairman & Managing Director, Knight Frank India.
SBI Research believed that the RBI will pause rate hikes in its February Policy. “In the current rate cycle, rate actions, both hikes and cuts, have been largely synchronized. We find evidence that synchronized rate actions have resulted in increased market volatility and financial stability in both the period post global financial crisis and the current regime. A nonsynchronous monetary policy action in 2023 by central banks across the world could thus materially result in lower volatility and financial stability…RBI might take cues…as financial stability takes precedence… We believe at 6.25%, it could be the terminal rate for now,” Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI wrote in ‘Prelude to MPC Meeting’ report.
Umesh Kumar Mehta, CIO at SAMCO Mutual Fund, also expected a pause in the Repo Rate hike. “Given, how well the RBI has controlled inflation in recent months, we anticipate that it will soon align with the government’s preference for growth. Through recent reforms on taxation front, the government seems to have changed the rules to shift India’s economy from one focused on savings to one driven by consumption. This week a status quo is expected or at the best, one last hike and then rate hikes could be paused. We anticipate a halt in interest rate hikes in the subsequent next months, followed by the reversal in rates starting next year,” he said.
Archit Gupta, Founder and CEO, Clear said “The Repo Rate is the rate at which the RBI lends short term funds to the other banks. Repo rate is very closely related to the lending rates of the commercial banks. Since the Repo rate is hiked the banks will now have to pay a higher amount of interest to the RBI which in turn shall be collected from the retail/ corporate borrowers of the banks. This would result in higher interest outflow on loans taken from the banks. Thus the loans in general will become costlier by 1-2%."
CA Manish P. Hingar, Founder at Fintoo said “The RBI announced a 25 basis points increase in the repo rate to 6.5% today, with the decision made by a 4 out of 6 majority on the Monetary Policy Committee (MPC). Despite volatile global developments, the Indian economy remains robust. The rate hike, which was in line with market expectations, surprised some who felt there was a possibility of a rate pause given the recent softening of inflation in India. However, the RBI was more concerned about high and persistent core inflation and the impact of rate hikes by other major central banks on the foreign exchange market. Barring any unexpected rise in inflation, the RBI is expected to maintain its current policy rate for the rest of 2023, which would benefit both the debt and equity markets. The peak of the rate cycle is believed to be near, and the central bank is expected to start easing rates in the next calendar year, as long as inflation remains under control. The 25 basis points hike is seen as a measure to protect the rupee from further depreciation, control import-driven inflation, and promote sustainable growth at a rate of 6.5% or higher. As a result of this announcement, home loans are expected to become more expensive."
Mr. Marzban Irani, CIO- Debt, LIC Mutual Fund said “Generally, with the rise in repo rates, banks tend to increase FD rates and Loan rates. However, it depends on the liquidity situation and capital requirement of individual banks as in the last few months, the FD rates have already gone up. In current scenario, given our view that yields may have peaked, any meaningful rise in FD/loan rates seems unlikely."
Ram Shri Ram, Mahagram's CEO stated that the Reserve Bank of India increased the repo rate by 25 basis points. This decision is likely to have a profound impact on the Indian monetary system. Particularly in terms of fixed deposits, loans, and then the real estate sector. With this hike, it is pertinent to say that the impact on the repo rate will surely have an impact on the (NBFCs) non-banking financial companies and this will eventually trickle down toward consumers because banks are now likely to raise their interest rates on fixed deposits and loans. Most imperatively, the central bank should bring financial stability to lending companies. Also, fintech companies that offer retail banking services are presumably to endure due to decreasing demand for their services. On the other hand, it also has to be considered that it will widely affect businesses as this is the sixth hike in the repo rate. The inflation is likely to stay at 4% and the Governor is expecting it to average 5.6% by the fourth quarter of 2023-24. The governor is confident about the GDP growth, it is projected to be at 6.4% in the financial year 2024. However, Since fintech companies are heavily dependent on low-interest rates, this rise in repo rate could have long term effect on their business operations and profitablity. He emphasized that the Indian economy is resilient even though the global environment is challenging.
Binitha Dalal, Founder & Managing Partner, Mt K Kapital said “We are now 0.25% higher than the pre pandemic repo rate of 2019 and we hope this is the end of the rate increase cycle. While the interest rates have gone up by 2-3% in comparison the GDP and strength of the Indian economy is much better than the pre pandemic levels at 6.9%. The avg emi has gone up by 7000/- for a loan of 50lacs in the last 2 years however the earnings per capita has gone up by 18.3% thus showing strength in absorbing the rate hike. Real estate as a sector has continued to do well with promising sales numbers through the year and now that we are reaching the peak of interest rates we expect home sales to grow further. While we understand where the Governor is coming from towards this rate hike, we urge him to put a pause on it so as to continue the growth trend for our economy."
Mr Amrutesh Reddy, Managing Director, NDR Warehousing said “The surge in commodity prices has already posed a challenge for the logistics sector, despite the RBI's 25 bps rate increase being in line with industry expectations. The capex outlay will now decrease due to the hike, making it difficult for industry players to maintain their infrastructure projects. Although the RBI has made a commendable attempt to control inflation and the rupee, the expansion of the infrastructure and logistics sectors may be hampered. In order to promote the contributions made by the players to the Indian economy, we anticipate that concessions for infrastructure projects will become even easier in the future."
Mr. Sandeep Bagla, CEO, TRUST Mutual Fund said “A 25 bp hike in repo rate by RBI was baked in bond yields. 2 out of 6 MPC members voted for no rate hike. Market is a tad disappointed as there was no change in stance from “withdrawal of accommodation" to neutral. CPI Inflation is projected for FY24 at 5.3%. Market forecasters are expecting inflation to trend lower from RBI projections. The policy remains focussed on fighting inflation and should be welcomed by markets."
Ms. Shalini Tibrewala, Senior Fund Manager (Fixed Income), JM Financial Asset Management Limited said “The Reserve Bank of India hiked its key repo rate by 25 basis points as expected but surprised markets by leaving the door open to more tightening, saying core inflation remained high. The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent though still remains well-above target in major economies. The situation remains fluid and uncertain," RBI Governor Shaktikanta Das said while announcing the Monetary Policy Committee’s rate decision. The RBI hiked repo rate for the sixth consecutive time in the current financial year by 25 bps to 6.50% mainly to curtail inflationary expectations. RBI remains focused on its stance of withdrawal of accommodation to ensure inflation remains within target going forward, while supporting growth. RBI has maintained the growth forecast at 7% (6.8% previously) and inflation forecast at 6.50% (6.7% previously) for FY 22-23 respectively. For FY 23-24 growth is projected at 6.40% and CPI inflation at 5.30% with risks evenly balanced on either side."
Amit Shankar, Vice President- Credit, Vivriti Capital said “RBI’s prudent approach to long term discipline has been well established amongst global economies. Continuing with the same theme, 25 basis points hike in repo rate has been targeted to control inflation rather than provide short term relief to slowdown concerns. We expect the inflation to stay within permissible limits given RBI's continued cautious outlook. While in near term this may lead to slower credit growth in general, there are ample opportunities of credit discovery and solid mid-market companies requiring growth capital that could provide impetus to the underwriting activity. We expect RBI to switch to a dovish stance if inflation moderates and economic activities pick up."
Rajesh Shet, Co-Founder & CEO SahiBandhu said “The hike in repo rate by 25 bps may have a sizeable impact on the loan sector as the interest rates are likely to go up for personal loan, home loan etc. However, for Gold Loan customers, interest rate is not the only selection criteria. Other factors such as LTV [Loan To Value], Loan tenure, urgent requirement of funds etc. are also considered while availing Gold Loan. For a low-ticket loan, the change in interest rate may not have a significant impact on the interest outgo. Infact, if more people are made aware of this reasonable credit source, then they could make the most of this information and consider gold loan as their preferred mode over conventional loans to meet their financial needs. Gold loans are already a popular source of funding for people with limited access to other forms of credit, and the increased cost of borrowing through traditional loans could further drive up the demand for gold loans."