Explaining the RBI’s recent policy stance, how banks can protect themselves, and more

Welcome to Finance Wrap India, a simplified fortnightly guide to everything finance, told through the voice of experts on LinkedIn and put together by LinkedIn News India editor?Preethi Ramamoorthy .?

In this edition, we try to understand:

?? The RBI's stance from its recent policy meeting

?? How banks can protect themselves from frauds

??Top conversations among finance professionals in India

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Creator manager:?Aanvi Kamdar

When the Reserve Bank of India (RBI) Monetary Policy Committee met in April, the numbers on the growth as well as inflation fronts were sobering. At 4.7%, the GDP growth in the October-December 2022 quarter was the lowest in that financial year. Inflation, on the other hand, was well above the RBI threshold at 6.4%.?

But fast-forward to June and the numbers paint a different story. India continued to be one of the fastest-growing economies in the world, with its Q4 GDP accelerating to 6.1%. Inflation had also slowed down to 4.7%.?

Expectations were rife that the RBI would move away from its “pause, not pivot” stance and announce a rate cut. However, the central bank continued to maintain the status quo, keeping the repo rate unchanged at 6.5%. ?

What could be behind such a stance??

“One reason is surplus liquidity in the system,” says Tamal Bandyopadhyay , Finance Adviser and Consulting Editor at Business Standard. “It could rise even further as more ?2,000-rupee banknotes get deposited in banks.”

The RBI had announced in May that all ?2,000 notes will be withdrawn from circulation, advising citizens to deposit or exchange them at a nearby bank.?

Experts say ensuring price stability is also another factor that led the RBI to keep the policy rates unchanged. RBI Governor Shaktikanta Das asserted that “the best contribution of monetary policy to the economy’s ability to realise its potential is by ensuring price stability”.

Das acknowledged that even as headline inflation eased to 4.7%, retail price gains were still above the target and expected to remain so according to the RBI’s projections for 2023-24.?

“The spike in demand due to pent up consumption is now over and the economy is up against major possible headwinds — crude shock, poor monsoon, currency depreciation to name a few. If the monsoon disappoints, food inflation will again shoot up,” says Anurag Singal , Founder of Betafin, a financial services company.?

Several reports suggest that the interest rate cycle has peaked and the next move could be a cut in policy rates — whenever it happens. Experts say that the RBI is walking a tightrope in this regard.?

“It needs to keep inflation under control, but it also needs to support economic growth,” says Seemant Srivastava, Co-founder at Mool, a fintech platform. “The RBI’s decision to pause rate hikes is a good start, but it will need to take other steps to support economic growth if it wants to achieve its dual mandate of price stability (inflation) and growth.”

Digitisation has taken every industry by storm. And payments has been one area which has experienced rapid change. A steady growth has been observed in the way India pays — right from net banking to UPI.?

But as digitisation grows, so does the risk of frauds. The value and volume of digital frauds committed using internet-based payment methods nearly doubled in FY23, reports Financial Express, citing data from the RBI.?

“As the landscape of fraud continues to evolve, banks must adopt effective measures to protect themselves and their customers,” says Pranjal Parihar , Vice-President, Commercial Banking at HSBC.?

Experts say fraudsters are using new techniques to scam customers — phishing, malware being designed to extract and copy data from the infected device of a bank customer, and SIM cloning, said a report by Bureau, an AI security architecture platform.

Banks have suggested several measures to the RBI to curb online frauds. These include a threshold for transactions in new accounts, a Central “negative registry” of the accounts of known fraudsters, and a standard operating procedure to stop the downstream flow of funds once a fraud is reported.

But what measures can they take from their end??

“One logical extension of digital security would be that AI, ML, and fast processing of big data can converge for a deeper adoption of something beyond multi factor authentication, some sort of ‘contextual authentication’,” says Anil Ghelani, CFA Head Passive Investments & Products at DSP Mutual Funds.

Contextual authentication would be able to add a further layer of security over multifactor authentication by checking for variables like geographic location, user behaviour, and device used, he says.?

Large banks are undertaking aggressive awareness programmes to tackle the menace of payment frauds. For instance, HDFC bank has sent over 20 million SMS text messages and 8.5 million emails to customers on fraud awareness.

Parihar says banking professionals play a vital role in combating financial fraud. “Continuous education and training, vigilant monitoring, compliance with security standards, and customer support are all part of their responsibilities in protecting against fraud.”

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