RBI Monetary Policy August 2023 -The Yellow Light continuous to Blink

RBI Monetary Policy August 2023 – The Yellow Light continuous to Blink

Once again, as consensus discussed, Reserve Bank of India (#RBI) has kept the #repo rate unchanged at 6.5%, for the third time in a row, with more positives pointers. Meanwhile, Monetary Policy Committee (#MPC), has continued to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

On #inflation front, ?RBI rose the inflation outlook #Indiacpi for FY24 to 5.4% from 5.1% in the July 2023 policy announcement. Though, RBI expects the spike in vegetables prices to reverse in future, it is vigilant of uneven rainfall distribution, El Ni?o effects and risks coming from hardening global food prices on renewed geopolitical tensions. ?Overall, RBI will maintain a close vigil on the evolving inflation scenario and remain resolute in its commitment to aligning inflation to the target and anchoring inflation expectations.

RBI has kept its #indiagrowth outlook stable once again at 6.5% for FY24. In spite, growth prospects of most major advance & #emergingeconomies are being impinged, #India has withstand the external headwinds and came out as the fastest growing economies. Aggregate demand conditions continue to be buoyant with both rural and urban demand indicators throwing signals of sustainable growth. ?The growth is also fuelled by the #investmentactivity gaining further steam on the back of government capital expenditure, rising business optimism and revival in private capex in certain key sectors.

On external front, the effect of weak external demand has started showing its impact on the #Indiatrade data as the merchandise exports and imports have been contracting on year since December 2022. On other hand, the service exports and remittances to India should provide cushion to the India’s external position. On the financing side, foreign portfolio investment (#indiaFPI) flows have remained buoyant in FY24 while the foreign direct investment (#indiaFDI) has shown downtick due to the global slowdown in FDI flows. Overall RBI, is expecting the Current Account Deficit (CAD) to remain eminently manageable during the current financial year also after CAD being 2.0% of GDP in FY23 and 1.2% of GDP in FY22.

RBI?is surely cognizant about the working impact of its cumulative rate hike of 250 basis points and hence kept rates unchanged. However, RBI is prepared to undertake policy responses, should the situation so warrant. Like previous policy statements, the MPC will maintain a close vigil on the evolving inflation scenario and?remain resolute in its commitment to aligning inflation to the target and anchoring inflation expectations. The MPC also decided to remain focused on ‘withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth’.

Once again, for the third time, all 6 MPC members were unanimous on keeping repo rate unchanged. And on policy stance, it was 5-1 voting.

Other key indicators and measures:

Liquidity Management

RBI has been agile in maintaining the adequate #liquidity. However, recently there have been persistent signs of excess liquidity which can pose risks to price stability and also to #financialstability. Hence, to curtail the excess liquidity, RBI has been decided that with effect from the fortnight beginning August 12, 2023, scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10 % on the increase in their net demand and time liabilities (#NDTL) between May 19, 2023 and July 28, 2023. This is a temporary measure and there will be adequate liquidity in the system to meet the credit needs of the economy. The ICRR will be reviewed on September 8, 2023 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season.

Review of Regulatory framework for Financial Benchmark Administrators

RBI will put in place a comprehensive, risk-based framework covering administration of all benchmarks related to foreign exchange, interest rates, money markets and government securities. The new Directions will provide greater assurance about the accuracy and integrity of benchmarks.

Greater transparency in Interest Rate Reset of EMI based Floating Interest Loans

The proposed proper conduct framework envisages that lenders should clearly communicate with the borrowers for resetting the tenor and/or EMI, provide options of switching to fixed rate loans or foreclosure of loans, transparent disclosure of various charges incidental to the exercise of these options, and proper communication of key information to the borrowers.

AI Based #upipayments

RBI has proposed to launch an innovative payment mode viz., “Conversational Payments” on #upi, that will enable users to engage in a conversation with an AI-powered system to initiate and complete transactions in a safe and secure environment. This channel will be made available in both smartphones and feature phones-based UPI channels, thereby helping in the deepening of digital penetration in the country.

Increasing use of Offline UPI Payments

To promote the use of #UPILite, it is proposed to facilitate offline transaction using Near Field 4 Communication (NFC) technology. This feature will not only enable retail digital payments in situations where internet / telecom connectivity is weak or not available, it will also ensure speed, with minimal transaction declines.

Enhancing transactions limits for small value digital payment

To encourage wider adoption of the offline mode of payments including for National Common Mobility Card (NCMC) and UPI Lite, it is now proposed to increase the per transaction limit to ?500 ?from ?200. From The overall limit is, however, retained at ?2000 to contain the risks associated with relaxation of two-factor authentication.

Public Tech Platform for Frictionless Credit

Based on the learnings from the pilots projects launched for digital credit delivery and expand the scope to all types of digital loans, a digital Public Tech Platform is being developed by the Reserve Bank Innovation Hub (#RBIH). The Platform would enable delivery of frictionless credit by facilitating seamless flow of required digital information to lenders. The end-to-end digital platform will have an open architecture, open Application Programming Interfaces (#APIs) and standards, to which all financial sector players can connect seamlessly in a ‘plug and play’ model.

SCBs should increase their efforts to increase recoveries of bad loans.

RBI is emphasising #indianbanks to have a board-approved policy for write-offs and also follow up on this in terms of maximising recovery. RBI would like banks to redouble their efforts, because these are accounts which are packed under a special account, and RBI would like to see more and more recoveries because they directly go into aiding the P&L (profit and loss) of the banks and contribute to their financial well-being.

Future Outlook

The steps on developmental and regulatory policies are also welcomed, particularly on transparency ?in floating rates loans and digital payments. The implementation of the incremental cash reserve ratio could be seen as a surprise for some and for some it would be on expected lines as there was a need to curb the excess liquidity in the system (it might suck out ?500 ?700 billion)

The benchmark 10-year yield will be in the range of 7.10% - 7.20%. As mentioned in earlier review, the government borrowing will smooth through.

The #rupee also been stable in the CY23 and should be the case going forward uncles there is major friction in globally.

Inflation remains a concern, and also RBI increased the forecast for CPI in FY24 to 5.4% from 5.1%. Meanwhile, both the RBI and the government has been taking adequate steps to curtail high commodity prices. Having said that, RBI is determinedly focused on inflation curtailment to 4.0% and would be the priority for RBI as put by Mr. Shaktikanta Das ‘if CPI idiosyncrasies are generalised, we may have to act.’

It is clearer from the overall policy that the “yellow” signal light is still being shown. I now do not see any rate cuts in current fiscal FY24. I did expect a little chance of so in the last quarter of FY24 but now it should be in next fiscal of FY25.