Mumbai: The Reserve Bank of India (RBI) on Thursday announced that its leaving its key interest rates unchanged for a third straight meeting. However, it did not shy away from warning stringent measures if food prices drive inflation higher.
The Monetary Policy Committee (MPC), which has three members from the central bank and a similar number of external members, held the benchmark repurchase rate (repo) at 6.50 per cent in a unanimous decision, said the RBI Governor Shaktikanta Das, while briefing after the bi-monthly meeting of the MPC.
Das warns of stricter measures- The Committee retained the stance on "withdrawal of accommodation". Das who highlighted that headline inflation needs to subside sustainably below 4 per cent and any surge in the inflation print, if continued for a longer period, warned that the bank may have to necessitate fresh action.
ICRR reduced- The central bank announced reduction of the cash in the banking system by raising the incremental cash reserve ratio (ICRR) to 10 per cent on the incremental NDTL (net demand and time liabilities) over the last 3 months. This will help in absorbing a large part of the excess liquidity created through the return of the Rs 2,000 notes and the large dividend to the government from RBI.
The decision is expected to suck out about Rs 1 lakh crore from the banking system. This liquidity tightening measure will not impact credit needs of productive sectors, according to Das.
Inflation risks persist- "The job on inflation is still not done. Inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions and weather-related uncertainties."
The central bank raised its inflation forecast for the current financial year ending March 2024 to 5.4 per cent from 5.1 per cent earlier. It cited pressures from food prices. In the July-September quarter, it saw inflation at 6.2 per cent, significantly higher than the 5.2 per cent earlier forecast.
"We do look through idiosyncratic shocks but if it shows signs of persistence, we have to act," Das said giving the rationale behind the decision of the MPC meeting here.
Moderation in core prints- The central bank boss stated that the Committee drew its confidence from moderation in core prints and expects a seasonal correction in food prices in the fourth quarter of 2023.
This is the third straight meeting where RBI kept interest rates unchanged. Prior to that, it had raised interest rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.
RBI retained its projection for Indian economic growth at 6.5 per cent for the current 2023-24 fiscal year (April 2023 to March 2024)."Aggregate demand conditions continue to be buoyant," Das said. Food price spikes in India, typical at the onset of the monsoon, drove up headline inflation in June, snapping a four-month downward trend.
Inflation- Headline inflation, after reaching a low of 4.3 per cent in May 2023, rose in June and is expected to surge during July-August led by vegetable prices.
"While the vegetable price shock may reverse quickly, possible El Nio weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far," Das said. "These developments warrant a heightened vigil on the evolving inflation trajectory."
According to him, the MPC has remained resolute in its commitment to aligning inflation to the 4 per cent target and anchoring inflation expectations. "Bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4.0 per cent," he said.
Other measures announced on Thursday included a proposal to put in place a transparent framework for reset of interest rates on floating-interest loans. It will also provide borrowers options for switching to fixed-rate loans or foreclosure of loans.
RBI also allowed 'conversational payments' on UPI, which will enable users to engage in conversation with AI-powered systems to make payments. It also introduced offline payments on UPI using Near Field Communication (NFC) technology through 'UPI-Lite' on-device wallet and enhanced the transaction limit for small value digital payments in off-line mode from Rs 200 to Rs 500 within the overall limit of Rs 2,000 per payment instrument.
Takeaways from the bi-monthly monetary policy unveiled by the Reserve Bank Governor Shaktikanta Das on Thursday:
- Policy repo rate retained at 6.5 pc
- Focus on withdrawal of accommodative policy stance to ensure that inflation progressively aligns with target, while supporting growth
- Retains GDP growth projection for FY'24 at 6.5 pc
- Marginally revises upwards inflation forecast to 5.4 pc
- Spike in vegetable prices, led by tomatoes, may exert sizeable upside pressures on near-term inflation trajectory
- Vegetable prices likely to correct with fresh market arrivals
- RBI to ensure greater transparency in interest rate reset of EMI-based floating interest loans
- Borrowers to get options of switching to fixed rate loans or foreclosure of loans
- RBI proposes use of Artificial Intelligence (AI) in UPI payments
- Near Field Communication (NFC) technology to be used in offline payments in UPI-Lite
- Proposes to enhance transactions limits for small value digital payments to Rs 500 from Rs 200 in UPI Lite
- Announces measure to absorb surplus liquidity generated by various factors, including return of Rs 2000 notes to the banking system
- Cash reserve ratio (CRR) remains unchanged at 4.5 pc
- Current account deficit to remain eminently manageable during current financial year
- Foreign portfolio investment flows have remained buoyant in 2023-24 so far, net FPI inflows at USD 20.1 bn up to Aug 8, highest since 2014-15
- Net FDI fell to USD 5.5 bn during Apr-May 2023, compared to USD 10.6 bn in year-ago period
- Next meeting of the RBI rate setting panel (MPC) scheduled during October 4-6 (with PTI inputs)
