RBI Monetary Policy 5th April 2024: Key Highlights

The Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday announced the first monetary policy of the financial year 2024-25. The two-day review meeting of the RBI's Monetary Policy Committee (MPC), the rate-setting panel, commenced on April 3 and concluded today, April 5. The RBI decided to keep the key policy repo rate unchanged at 6.5% for the seventh consecutive time. The six-member MPC headed by Governor Das also decided to maintain the policy stance at ‘withdrawal of accommodation’. The RBI has projected India’s real GDP growth rate for FY25 at 7%. CPI inflation for FY25 is estimated at 4.5%.

The key highlights of RBI April policy are as under:

Policy Measures:

• Repo rate kept unchanged at 6.5%
• Policy stance of ‘withdrawal of accommodation’ maintained 
• GDP growth forecast for FY25 at 7%. The quarterly projections are - Q1 at 7.1%; Q2 at 6.9%; Q3 at 7% and Q4 at 7%.
• CPI inflation forecast for FY25 at 4.5%. Here are detailed inflation forecast: Q1 at 4.9%; Q2 at 3.8%; Q3 at 4.6% and Q4 at 4.5% 

Non-policy measures:

• Scheme for trading of sovereign green bonds at IFSC to be announced
• Introduction of a mobile app to access RBI’s Retail Direct Scheme for participation in GSec market
• Draft circular for LCR framework for banks to be issued shortly
• Dealing in rupee interest rate derivate products for all small finance banks
• Enabling UPI for Cash Deposit Facility
• UPI access for Prepaid Payment Instruments (PPIs) through third-party applications
• Distribution of CBDCs through Non-bank Payment System Operators
• Next MPC meeting scheduled during June 5 to 7, 2024

Rationale for these decisions:

Since the last policy, the growth-inflation dynamics have played out favourably. Growth has continued to sustain its momentum surpassing all projections. Headline inflation has eased to 5.1 per cent during January and February 2024 from 5.7 per cent in December 2023, with core inflation declining steadily over the past nine months to its lowest level in the series. Fuel component of the CPI remained in deflation for six consecutive months. Food inflation pressures, however, accentuated in February. Looking ahead, robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4.0 per cent. As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation. Under these circumstances MPC observed monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions. The MPC, therefore, decided to keep the policy rate unchanged at 6.50 per cent in this meeting and remain focused on withdrawal of accommodation. The MPC will remain resolute in its commitment to aligning inflation to the target.

Global Growth: The global economy has remained resilient with a stable outlook as reflected in various high frequency indicators. Global trade is expected to grow faster in 2024, although weaker than its historical average. Central banks are cautious in their communications, thereby tempering market expectations about the timing and magnitude of interest rate cuts later during this year. Equity markets have gained while bond yields and US dollar have remained volatile. The overall outlook is challenged by continuing geopolitical conflicts, disruptions in trade routes and high public debt burden.

Domestic Growth: Domestic economic activity continues to expand at an accelerated pace, supported by fixed investment and improving global environment. The second advance estimates (SAE) placed real GDP growth at 7.6 per cent for 2023-24, the third successive year of 7 per cent or higher growth. The industrial activity led by manufacturing continued its momentum. The purchasing managers’ index (PMI) for manufacturing displayed a sustained expansion in February-March, touching a 16-year high in March. Services sector exhibited broad based buoyancy with all sectors registering strong growth. The PMI services remained above 60 during February-March, suggesting sustained healthy expansion.

Real GDP growth for 2024-25 is projected at 7.0 per cent with Q1 at 7.1 per cent; Q2 at 6.9 per cent; Q3 at 7.0 per cent; and Q4 also at 7.0 per cent. The risks are evenly balanced.

Inflation: Assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent. The risks are evenly balanced.

Liquidity and Financial Market:

Reserve Bank will remain nimble and flexible in its liquidity management through main and fine-tuning operations in both repo and reverse repo. RBI will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner that preserves financial stability.

The Indian rupee (INR) has remained largely range-bound as compared to both its emerging market peers and a few advanced economies during 2023-24. The INR was the most stable among major currencies during this period. As compared to the previous three years, the INR exhibited the lowest volatility in 2023-24. The relative stability of the INR reflects India’s sound macroeconomic fundamentals, financial stability and improvements in the external position.

Financial Stability: Latest data as at end-December 2023 show that the key indicators of capital and asset quality of scheduled commercial banks (SCBs) continued to be healthy. The financial indicators of non-banking financial companies (NBFCs) are also in line with that of the banking system as per the latest available data. Banks, NBFCs and other financial entities must continue to give the highest priority to quality of governance and adherence to regulatory guidelines.

A Master Direction for rationalising and harmonising supervisory returns has also been issued.

External Sector: During the first three quarters of 2023-24, India’s current account deficit (CAD) narrowed significantly on account of a moderation in merchandise trade deficit coupled with robust growth in services exports and strong remittances.

India’s foreign portfolio investment (FPI) flows saw a significant turnaround in 2023-24. Net FPI inflows stood at US$ 41.6 billion during 2023-24, as against net outflows in the preceding two years (US$ 14.1 billion in 2021-22 and US$ 4.8 billion in 2022-23). Net foreign direct investment (FDI) moderated to US$ 14.2 billion in April-January 2023-24 from US$ 25.0 billion a year ago.

India’s foreign exchange reserves reached an all-time high of US$ 645.6 billion as of March 29, 2024.

Additional Measures announced by RBI Governor:

Trading of Sovereign Green Bonds in International Financial Services Centre (IFSC)

With a view to facilitating wider non-resident participation in Sovereign Green Bonds, a scheme for investment and trading in these Bonds in the IFSC will be notified shortly.

RBI Retail Direct Scheme - Introduction of Mobile App

The RBI Retail Direct Scheme was launched in November 2021. It is now proposed to launch a mobile app for accessing the Retail Direct portal. This will be of greater convenience to retail investors and deepen the G-sec market.

Review of Liquidity Coverage Ratio (LCR) Framework

Technological developments have enabled bank customers to instantly withdraw or transfer money from their bank accounts. While improving customer convenience, this has also created challenges for banks to deal with potential situations when, due to certain factors, a large number of depositors decide to instantly and simultaneously withdraw their money from banks. The developments in certain jurisdictions last year demonstrated the difficulties it can create for banks to deal with such situations. A need has, therefore, arisen to undertake a comprehensive review of the LCR framework for banks. A draft circular will be issued shortly for stakeholder consultation.

Dealing in Rupee Interest Rate Derivative products – Small Finance Banks

At present, Small Finance Banks (SFBs) are permitted to use only Interest Rate Futures (IRFs) for proprietary hedging. It has now been decided to allow SFBs to use permissible rupee interest derivative products. This will allow further flexibility to SFBs for hedging their interest rate risk and enhance their resilience.

Enabling UPI for Cash Deposit Facility

Deposit of cash through Cash Deposit Machines (CDMs) is primarily being done through the use of debit cards. Given the experience gained from card-less cash withdrawal using UPI at the ATMs, it is now proposed to also facilitate deposit of cash in CDMs using UPI. This measure will further enhance customer convenience and make the currency handling process at banks more efficient.

UPI Access for Prepaid Payment Instruments (PPIs) through Third Party Apps

At present, UPI payments from Prepaid Payment Instruments (PPIs) can be made only by using the web or mobile app provided by the PPI issuer. It is now proposed to permit the use of third-party UPI apps for making UPI payments from PPI wallets. This will further enhance customer convenience and boost adoption of digital payments for small value transactions.

Distribution of Central Bank Digital Currency (CBDC) through Non-bank Payment System Operators

The CBDC pilots are currently in operation with increasing number of use-cases and participating banks. It is proposed to make CBDC-Retail accessible to a broader segment of users by enabling non-bank payment system operators to offer CBDC wallets. This will also facilitate testing of the resiliency of CBDC platform to handle multi-channel transactions.

RBI Governor Shaktikanta Das said "As we progress towards RBI@100, the upcoming decade is going to be a transformational journey. The Reserve Bank will continue to focus on preserving financial stability and promoting a system that is robust, resilient and future-ready to support economic growth. Price stability will be a key component of this endeavour."

Meeting Schedule of the Monetary Policy Committee for 2024-2025

As per Section 45ZI of Reserve Bank of India Act, 1934, RBI decided that the Monetary Policy Committee will meet during the 2024-25 on the dates indicated below: Dates of meetings of Monetary Policy Committee for 2024-25 April 3-5, 2024 June 5-7, 2024 August 6-8, 2024 October 7-9, 2024 December 4-6, 2024 February 5-7, 2025

Please click on the following link to read : Governor’s Statement: April 5, 2024  & Monetary Policy Statement, 2024-25 Resolution of the Monetary Policy Committee (MPC) April 3 to 5, 2024

Source: rbi.org.in ; Livemint, The Hindu- Business line.