RBI’s Bi-Monthly Review Meeting 6th October 2023 – Key Highlights

The Monetary Policy Committee (MPC) met on 4th, 5th and 6th October 2023. After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided unanimously to keep the policy repo rate unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 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 progressively aligns to the target, while supporting growth.

MPC’s rationale for these decisions:

Headline inflation had surged in July,it corrected partly in August and is expected to see further easing in September on the back of moderation in these prices. A silver lining amidst all these is declining core inflation. The overall inflation outlook, however, is clouded by uncertainties from the fall in kharif sowing for key crops like pulses and oilseeds, low reservoir levels, and volatile global food and energy prices. The MPC observed that the recurring incidence of large and overlapping food price shocks can impart generalisation and persistence to headline inflation. Economic activity, on the other hand, has remained resilient. Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points which is still working through the economy, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting. The transmission of the 250 basis points (bps) increase in the policy repo rate to bank lending and deposit rates is still incomplete and hence the MPC decided to remain focused on withdrawal of accommodation.² The MPC remains highly aIert and prepared to undertake timely policy measures, as may be necessary, in order to align inflation to the target and anchor inflation expectations.

Global Economy v/s Domestic Economy:

Global growth is losing momentum. Inflation is easing gradually but remains well above target in major economies. Concerns about higher for longer rates are imparting volatility to global financial markets. Sovereign bond yields have hardened, the US dollar has appreciated, and equity markets have corrected. Emerging market economies (EMEs) are experiencing currency depreciation and volatile capital flows. The global economy is slowing under the impact of tight financial conditions, protracted geopolitical tensions and increasing geoeconomic fragmentation. Global trade is contracting.³ Headline inflation is easing but rules above the target in major economies.

In contrast to global trends, domestic economic activity exhibits resilience on the back of strong domestic demand.

The latest RBI policy review comes at a time when major central banks around the globe continue to struggle against red-hot inflation trying not to damage the pace of growth.

Highlights of the Monetary Policy:

• All 6 RBI MPC members unanimously voted to keep 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% to 6.50% at its meeting in February 2023.
• RBI remains focused on withdrawal of accommodation support growth, tame inflation.
• Cumulative repo rate hike of 250 bps still working its way through economy.
• The I-CRR was reviewed on September 8 and is being discontinued in a phased manner, ending October 7, 2023.
• Real GDP growth for 2023-24 is projected at 6.5 per cent for FY24 with Q2 at 6.5 per cent; Q3 at 6.0 per cent; and Q4 at 5.7 per cent. The risks are evenly balanced. Real GDP growth for Q1:2024-25 is projected at 6.6 per cent.
• Inflation forecast (CPI inflation) is projected at 5.4 per cent for 2023-24, with Q2 at 6.4 per cent, Q3 at 5.6 per cent and Q4 at 5.2 per cent. The risks are evenly balanced. CPI inflation for Q1:2024-25 is projected at 5.2 per cent.  Near-term inflation is expected to soften on the back of vegetable price correction  & cut in LPG rates to soften inflation.
• RBI identifies high inflation as major risk to macroeconomic stability and sustainable growth.
• India is poised to become new growth engine of world.
• Limit of gold loan under Bullet Repayment Scheme for UCBs doubled to ₹4 lakh.
• Payments Infrastructure Development Fund scheme extended by 2 years to December 2025. It will now include beneficiaries of the PM Vishwakarma scheme.
• RBI has plans to undertake open market operation (OMO) with regard to G-secs to manage liquidity. This will be via auction mode.
• RBI will introduce the facility for creation of card-on-file tokenisation at the issuer bank level to enhance convenience for cardholders.
• RBI has allowed NBFCs (middle and base layer entities) to utilise credit risk mitigation tools to offset their exposure with eligible credit risk transfer instruments.
• Next Monetary Policy Committee (MPC) meeting scheduled for Dec 6-8, 2023.

Financial Stability

The Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth and robust earnings growth. The credit growth is broad-based and backed by the strong fundamentals of financial institutions. The financial indicators of non-banking financial companies are also in line with that of the banking system as per the latest available data for June 2023. Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards.

External Sector

The current account deficit (CAD) for Q1:2023-24 declined to 1.1 per cent of GDP from a year ago. There was an accretion of US$ 24.4 billion to foreign exchange reserves on balance of payments (BOP) basis during Q1:2023-24.
India’s foreign exchange reserves stood at US$ 586.9 billion as on September 29, 2023. 
Foreign portfolio investment (FPI) flows have seen a significant turnaround in 2023-24 with net FPI inflows at US$ 20.3 billion up to September 2023 as against net outflows in the preceding two years.²⁴ Net foreign direct investment (FDI), on the other hand, moderated to US$ 5.8 billion in April-July 2023 from US$ 17.3 billion a year ago.

Additional Measures announced by RBI Governor: RBI Governor also announced following additional Measure details of which can be read in the Governor's Statement:

Prudential Framework for Income Recognition, Asset Classification and Provisioning pertaining to Advances - Projects Under Implementation
Credit Concentration Norms – Credit Risk Transfer
Gold Loan – Bullet Repayment Scheme – UCBs
Framework for Recognition of Self-Regulatory Organisations (SROs) for Regulated Entities (REs) of Reserve Bank
Payments Infrastructure Development Fund – Extension of Scheme and Inclusion of PM Vishwakarma Scheme Beneficiaries
Introduction of New Channels for Card-on-File Tokenisation (CoFT)
Master Direction on Internal Ombudsman Mechanism in Regulated Entities -
It has been decided to effect certain changes and also consolidate and harmonise the IO guidelines into a single master direction. This will further strengthen the customer grievance redress system of the regulated entities.

Please click on the following link for : Governor’s Statement: October 6, 2023
Please click on the following link for : Monetary Policy Statement, 2023-24 Resolution of the Monetary Policy Committee (MPC) October 4 to 6, 2023

Source: rbi.org.in; Business Line ; Business Standard