RBI’s Bi-Monthly Monetary Policy Review 8th June 2023 – Highlights and Key Takeaways

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday 8th June 2023, kept the policy repo rate unchanged at 6.5 per cent in a unanimous decision. Governor Shaktikanta Das, while announcing the MPC decision, said that the central bank has retained the withdrawal-of-accommodation stance.  This was second time in a row that the RBI opted for a pause in rate hike. The central bank has retained growth projection at 6.5 per cent for FY24, expects 8 per cent growth in Q1, 6.5 per cent in Q2, 6 per cent in Q3, while 5.7 per cent in Q4. "Domestic demand condition remains supportive of growth, while rural demand on revival path," the governor said.

Highlights of the Policy:

- MPC Voted Unanimously to leave Repo Rate Unchanged at 6.50%
- MPC decided by a 5:1 majority to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth
- Prof Jayanth Varma voted against MPC’s stance resolution
- CPI forecast for FY24 lowered marginally to 5.1% from 5.2% earlier
- CPI forecast for 1H FY24 lowered, maintained for 2HFY24
- GDP forecast for FY24 left unchanged at 6.5%
- GDP forecast raised for 1H FY24, and lowered for 2HFY24

Key Takeaways from RBI's Monetary Policy: Rates, inflation & growth

  • Policy Rates - Repo rate, SDF, Bank Rate  & MSF
    RBI Monetary Policy Committee decided to keep repo rate unchanged at 6.5 per cent.   Das mentioned that the Standing Deposit Facility (SDF) rate remains at 6.25 per cent, while Marginal Standing Facility Rate and Bank Rate also unchanged at 6.75 per cent.
  • Policy stance
    MPC decided to remain focussed on withdrawal of accommodation of policy stance.
  • Growth projection
    RBI retains Real GDP growth projection at 6.5 pc for FY'24, expects 8 pc growth in Q1, 6.5 pc in Q2, 6 pc in Q3 and 5.7 pc in Q4.
  • Inflation projection
    RBI lowers retail inflation projection to 5.1 pc during FY'24 from earlier estimate of 5.2 pc. CPI inflation is projected at 5.1 per cent for 2023-24, with Q1 at 4.6 per cent, Q2 at 5.2 per cent, Q3 at 5.4 per cent and Q4 at 5.2 per cent. The risks are evenly balanced.
  • Headline inflation
    Headline inflation is above the target of 4 per cent and expected to remain so during rest of the year.
  • Current account deficit (CAD)
    Current account deficit (CAD) is likely to have moderated further and should be eminently manageable in 2023-24, the governor said.
  • Forex reserves stood at at $595.1 billion as on June 2.  Inclusive of net forward assets, foreign exchange reserves are well above US$ 600 billion.
  • Non-resident deposits
    Net inflow in non-resident deposits increased to USD 8 billion in FY'23 from USD 3.2 billion in previous year.
  • e-Rupee voucher
    RBI decided to expand the scope of e-rupee voucher by allowing non-bank companies to issue such instrument. It is now proposed to expand the scope and reach of e-RUPI vouchers by
    (i) permitting non-bank prepaid payment instruments (PPI) issuers to issue e-RUPI vouchers;
    (ii) enabling issuance of e-RUPI vouchers on behalf of individuals; and
    (iii) simplifying the process of issuance, redemption, etc.
    These measures will make the benefits of e-RUPI digital voucher accessible to a wider set of users and further deepen the penetration of digital payments in the country
  • Internationalising Issuance and Acceptance of RuPay Cards - Rupay forex cards
    RuPay Debit and Credit cards issued by banks in India are gaining increased acceptance abroad. It has now been decided to permit issuance of RuPay Prepaid Forex cards by banks. This will expand the payment options for Indians travelling abroad. Further, RuPay cards will be enabled for issuance in foreign jurisdictions. These measures will expand the reach and acceptance of RuPay cards globally.s.
  • Rs 2000 notes - Back to banks
    Rs 1.80 lakh cr of Rs 2,000 notes  out of 3.62 lakh crores, representing nearly half of outstanding notes in the withdrawn denomination, have returned back, informed Guv.  Around 50 percent of the Rs 2,000 currency notes in circulation as at the end March has returned to the banking system.
  • Rs 500 and Rs 1000 notes
    RBI not thinking of withdrawing Rs 500 notes, or re-introducing notes in Rs 1,000 denomination; request public not to speculate, said Guv.
  • Indian economy and financial sector stand out as resilient. Domestic macro fundamentals are strengthening.
  • Pace of global economic activity to decelerate due to geopolitical situation.
  • Cooperative lenders will soon be able to do technical write-offs and execute compromise settlements with defaulting borrowers.
  • RBI Monetary Policy: Surplus Liquidity
    • The average daily borrowings through the liquidity adjustment facility (LAF) between April and May amounted to ₹1.7 lakh crore, indicating less surplus liquidity compared to the ₹2.9 lakh crore observed throughout the entire fiscal year 2022–23.
    • Shaktikanta Das, the governor of the Reserve Bank of India (RBI), explained that various factors contributed to this reduction, including the maturity of targeted longer-term refinancing operations (TLTROs).
    • Additionally, the seasonal increase in money circulation and the accumulation of government cash balances during this period helped moderate the excess liquidity.
    • However, starting from the third week of May, the liquidity in the system increased due to higher government spending and a decrease in the amount of money in circulation.
    • The RBI’s market activities and the deposit of ₹2,000 banknotes in banks further added to this liquidity increase.
    • The presence of surplus liquidity and the higher utilization of the marginal standing facility (MSF) by some banks indicate an uneven distribution of liquidity within the banking sector.
    • To address this situation, the RBI conducted two 14-day variable rate reverse repo (VRR) auctions in February and March 2023, each totaling ₹50,000 crore.
    • In order to take prompt action on liquidity, the Reserve Bank conducted several VRR auctions, including a 14-day auction on June 2 for ₹2.0 lakh crore, a 4-day auction on June 5 for ₹1.0 lakh crore, a 3-day auction on June 6 for ₹75,000 crore, and a 2-day auction on June 7 for ₹75,000 crore. However, the response to these auctions has been cautious.

    Additional Measures announced by RBI

  • Streamlining the Bharat Bill Payment System (BBPS) Processes and Membership Criteria:
    To further enhance the efficiency of the BBPS system and to encourage greater participation, it is proposed to streamline the process flow of transactions and membership criteria for operating units.
  • Default Loss Guarantee Arrangement in Digital Lending:
    Reserve Bank had issued the regulatory framework for Digital Lending in August/September 2022. With a view to further promoting responsible innovation and prudent risk management, it has been decided to issue guidelines on Default Loss Guarantee arrangements in Digital Lending. This will further facilitate orderly development of the digital lending ecosystem and enhance credit penetration in the economy.

  • Borrowing in Call and Notice Money Markets by Scheduled Commercial Banks (SCBs):
    SCBs (excluding Small Finance Banks) can set their own limits for borrowing in Call and Notice Money Markets within the prescribed prudential limits for inter-bank liabilities.
  • Rationalisation of Licensing Framework for Authorised Persons (APs) under Foreign Exchange Management Act (FEMA), 1999:
    decided to rationalise and simplify the licensing framework for APs. This is expected to improve the efficiency in the delivery of foreign exchange facilities to various segments of users including common persons, tourists and businesses.

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

    The MPC recognised that the pace of global economic activity is expected to decelerate in 2023, dragged down by elevated inflation, tight financial conditions and geopolitical tensions. The pace of monetary tightening has slowed in recent months, but uncertainty remains on its future trajectory as inflation continues to rule above targets across the world.

    In India, consumer price inflation eased during March-April 2023 and moved into the tolerance band, declining from 6.7 per cent in 2022-23. Headline inflation, however, is still above the target as per the latest data and is expected to remain so according to our projections for 2023-24. Therefore, close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain. Real GDP growth in 2022-23, on the other hand, turned out to be stronger than anticipated and is holding up well.

    The policy repo rate has been increased by 250 basis points since May 2022 and is still working its way through the system. Its fuller effects will be seen in the coming months. Against this backdrop, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent. The MPC will continue to remain vigilant on the evolving inflation and growth outlook. It will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and bring down inflation to the target.

    With the policy repo rate at 6.50 per cent and full year projected inflation for 2023-24 at just a little above 5 per cent, the real policy rate continues to be positive. The average system liquidity, however, is still in surplus mode and could increase as ₹2,000 banknotes get deposited in the banks. Headline inflation, as noted before, is easing but rules above the target, warranting close monitoring of the evolving price dynamics. Taking all of these factors into account, the MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

  • Please click on the following link to read : Governor’s Statement: June 8, 2023  & Monetary Policy Statement, 2023-24 Resolution of the Monetary Policy Committee (MPC) June 6-8, 2023


Source: rbi.org.in, Economic Times, Money Control

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