PremiumRBI MPC Meeting 2023 Highlights: The Reserve Bank of India (RBI) Governor Shaktikanta Das announced the third bi-monthly monetary policy for FY24 on Thursday. The three-day meeting of the six member Monetary Policy Committee (MPC) of RBI was held from August 8 to 10. The RBI kept the repo rate unchanged at 6.5% today. Since May 2022, the central bank has raised the repo rate by 250 basis points (bps).
Here are key takeaways from RBI Policy:
Interest Rates:
- Repo rate unchanged at 6.5%
- Standing deposit facility (SDF) rate remains at 6.25%
- Marginal standing facility (MSF) rate and Bank Rate maintained at 6.75%
- CRR at 4.5%
GDP Projections:
Real GDP growth projection for FY224 retained at 6.5%
- GDP forecast for Q1FY24 at 8%
- GDP forecast for Q2FY24 at 6.5%
- GDP forecast for Q3FY24 at 6%
- GDP forecast for Q4FY24 at 5.7%
- GDP growth for Q1FY25 is projected at 6.6%
Inflation Forecast
- CPI inflation forecast for FY24 raised to 5.4% from 5.1%
- CPI inflation forecast for Q2FY24 raised to 6.2% from 5.2%
- CPI inflation forecast for Q3FY24 raised to 5.7% from 5.4%
- CPI inflation forecast for Q4FY24 retained at 5.2%
- CPI inflation forecast for April-June 2024 pegged at 5.2%
Liquidity Measures
All scheduled banks to 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.
Revision in IDF framework
The regulatory framework for Infrastructure Debt Funds (IDFs) has been revised.
The key changes in the revised framework are: (i) withdrawal of the requirement to have a sponsor for the IDFs, (ii) allowing IDFs to finance toll-operate-transfer (ToT) projects as direct lenders, (iii) permitting IDFs to raise funds through ECBs, and (iv) making tri-partite agreements optional for PPP projects.
On floating-interest loans
Proposal to put in place a transparent framework for reset of interest rates on floating-interest loans.
UPI
- To launch Conversational Payments on UPI
- Transaction limit of UPI Lite raised to ₹500 from ₹200
- To introduce offline payments using Near Field Communication (NFC) technology
The RBI’s decision to keep the repo rate unchanged at 6.50% is in line with the inflationary trends that have been visible so far as well as those expected going forward. While global growth is expected to be muted this financial year it is encouraging that overall economic activity in the Indian context has been encouraging.
The RBIs commitment to firmly focus on aligning inflation to the target of 4% signals a benign interest rate scenario going forward. The decision to increase incremental CRR is only intended to absorb the surplus liquidity generated by various factors and is a temporary measure for managing the liquidity overhang and is not likely to impact liquidity in the system. Overall, by keeping interest rates intact for the third straight time, the RBI has signalled that the economy benefits and continues to grow.
The MPC’s decision is seen as a ‘hawkish pause’. The RBI tinkers with liquidity to align it with the current monetary policy stance to enhance transmission of prior hikes.
Upward revision in inflation forecasts while watching any persistence of idiosyncratic price spikes, strengthens the case of ‘higher for longer’, a theme that is playing out globally too.
As India CPI inflation starts tapering-off in 2H FY24, we expect the repo rate to remain unchanged at 6.50%. Any price shocks could alter expectations.
Domestic equity market benchmarks, the Sensex and the Nifty extended their losses while rate-sensitive sectors such as banking, automotive, and realty initially turned green briefly, but later fell after the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) maintained a status quo on policy rates and stance on Thursday, August 10, as expected. Read here
The RBI kept its policy rate unchanged as expected at 6.5% but its message was clearly hawkish. This was reflected in the upward revision in Q2 FY24 inflation forecast by 100bps to 6.2% and the decision to tighten liquidity through the incremental CRR for banks. The latter could reduce system liquidity balance by ₹60,000-70,000 crore. While the ICRR decision is to be reviewed in September and could be a temporary decision but if inflation pressures linger on, the possibility of continued durable liquidity tightening is likely.
The RBI reiterated its resolve to bring inflation back to 4% on a sustainable basis and highlighted risks beyond the transitory vegetable price pressures. We expect inflation to average at 5.6% in FY24 with inflation expected to print above 6% till September.
Madhavi Arora, Lead Economist, Emkay Global Financial Services explains the impact of incremental CRR:
> Imposition of Incremental CRR (ICRR) of 10% on NDTL (for period of May 19 to July 28 ) would imply a temporary liquidity depletion of ~ ₹1.15 tn/ ₹996 billion (ex of HDFC twin merger). This assumes an effective CRR of 14.5% for the period concerned (4.5%+10%).
> However, if we assume the ICRR of 10% to include the existing CRR of 4.5%, the liquidity depletion would amount to ₹650 billion/ ₹548 billion ex of HDFC twin merger. We await clarity on RBI’s assessment of ICRR in the press conference. But we believe it has to be the former (i.e 14.5% effective CRR)
> Overall, this would also lead to some interest loss for banks, as banks were parking the short term liquidity into STPL (short term personal loans) and money markets, instead of parking with RBI in VRRR, which also helped in some softening of CP/CD rates.
> The immediate impact of RBI absorbing liquidity via ICRR will be mild hardening of money market rates for borrowers including NBFCs/corporates, while for banks as well there will be slight impact on their NIMs (3-4 bps) depending on the instruments where they were parking the money (assuming 14.5% effective CRR).
> That said, some banks (PSBs specifically) benefitted more than others from the liquidity glut due to Rs2K notes withdrawal, while others toiled to get deposits by increasing rates.
> However, all the banks will have to maintain ICRR and thus could be construed as unfair to some banks who did not benefit much from the ₹2,000 notes withdrawal (mainly PVBs).
> As expected, RBI fired warning shots for Banks/NBFCs given the agressive lending (unsecured loans) and they need to retain adequate provision buffers. As per our banking team, this will force regulated entities to maintain higher PCR or atleast discourage them from reversing provisions (thus some impact on RoA).
> Notably, ICICI, HDFC Bank, Axis Bank amongst banks have maintained a strong contingent buffer amongst banks (0.7-1.2%) and thus should not have any impact.
While vigil is warranted on the trajectory of the monsoon and impact of El Niño, we expect the policy rate to remain unchanged in CY23, with the next policy move likely to be a rate cut in April 2024 as headline inflation moderates. Mortgage interest rates have hardened in recent months, but are likely to remain unchanged for the rest of CY23 as the policy rate stays stable.
The inflation forecast has been increased, with the possibility of further upside risk in the near term. The overall setback is that high inflation is expected to persist for a long period of time, indicating that interest rates will remain high for a long time. Generally, high interest rates affect corporate earnings growth and valuation. However, the impact in India is likely to be nullified due to stable domestic demand and incremental global orders led by Chinas plus one strategy.
There were no surprises in the policy and unlike market expectations, there was no hawkish bend to the commentary. However, as any good central bank would do, the RBI signals that it would continue to look ahead and factor in its anticipated inflation trajectory into future monetary policy decisions. Effectively, the RBI will be looking through the likely spikes in the near term retail inflation as a result of the sharp increases in vegetable prices. The expectation is for such seasonal variations to dissipate with the arrival of the new crop – indicative in the inflation forecast of the RBI.
While the RBI has sharply increased the Q2 inflation forecast, the Q4 inflation forecast has remained unchanged. The vigil on inflation would continue to factor in all the moving pieces and the RBI keeps itself open to deploying all instruments that could be necessary to align inflation to the 4% target. Even as the rates remain unchanged, the RBI opined that excessive liquidity can pose risks to price stability.
The Incremental CRR was the best option at the current juncture, but it was not the only tool available to us to deal with the liquidity overhang, said RBI Governor Shaktikanta Das.
Private investment is happening in some key sectors like iron and steel, automobiles, petroleum, chemicals and metals, etc. It should happen in other sectors too going forward because the ground conditions are favourable, says RBI Governor Shaktikanta Das.
Liquidity is a dynamic figure and we can't specify if there is a comfortable level. We do fine-tuning operations on both sides, repo and reverse repo. We monitor the situation constantly, said RBI Governor Shaktikanta Das.
The review of incremental CRR for banks will take place on September 8 and depend on conditions prevailing at the time. The review can happen even before September 8, said RBI Governor Shaktikanta Das
Incremental CRR is applicable to all Scheduled banks and internal calculation suggests net impact of incremental CRR will be a little over ₹1 lakh crore, says RBI Governor Shaktikanta Das.
The incremental CRR is a purely temporary measure and considered necessary in the background of the liquidity overhang, said RBI Governor Shaktikanta Das.
We considered it desirable in the interest of financial and price stability. It will have an impact on inflation also, Das added.
There is adequate liquidity in the banking system. We are sensitive to the cash requirement ahead of the festive season, says RBI Governor Shaktikanta Das.
MPC maintains a 3rd consecutive pause on policy rates with continued comfort on external resilience and core inflation. Recent uptick in food inflation is expected to be short lived and is looked through as of now with monsoon picking up well. Stance still maintained as “withdrawal of accommodation" to keep flexibility against any negative surprises on domestic inflation.
Incremental CRR requirement a tad negative, though for a short time only. Overall, a well-balanced policy on expected lines with remote likelihood of any more rate hikes for now. A long wait for rate cut cycle as MPC re-iterates its commitment on 4% inflation target.
RBI prefers to be in “wait and watch" mode to check if the recent food price inflation is getting generalized and prefers to keep rates on hold and keep the monetary policy unchanged. FY24 inflation has been revised upward from 5.10% to 5.4%. Proactive government measures to curb food inflation should assist in keeping inflation lower.
RBI is likely to stay on hold for the rest of CY 2023. In order to address the Surplus Liquidity situation, RBI has asked banks to maintain incremental CRR of 10% on Deposit growth between 19th May and 28th July 2023, which will reduce liquidity in the system by ~ ₹90,000 crore.
It's cautiously optimistic monetary policy signalling a resolute focus on inflation targeting. Imposition of an incremental CRR of 10% on incremental liquidity generated out of the withdrawal of ₹2,000 notes, reflects the RBI's deft management of liquidity.
We have seen a dream run over the last 5 months post RBI holding rate hikes. We are seeing a continuity of the stance of withdrawal of accommodation, focus on growth and being vigilant of global macro developments.
However, recent developments around markets factoring in the positives on RBI holding rate hikes, developments around enhanced macro uncertainties, rise in food inflation and crude price and uncertainties around growth across developed and emerging nations can create short-term volatility in the markets.
India is comparatively isolated from the rest of the world in terms of economic factors and the long-term prospects look promising while such headwinds can impact the markets over the short term. Stagger your allocation for the next 2-3 months and don’t go aggressive on the markets at the moment, said Divam Sharma, Founder & Fund Manager at Green Portfolio PMS.
The RBI’s decision to maintain status quo in the repo rates augurs well for the real estate sector. It is important to note that the macro-economic fundamentals of the country are strong and the economy is performing well.
The continuation of existing policy rates and undoubtedly, a further reduction in interest rates in the near future would be preferred to bolster overall market confidence and make it more enticing for home buyers.
The RBI's pause in rate hikes over the past few quarters will certainly drive up real estate growth. With stronger domestic consumption and NRI demand, the upcoming festive tailwinds are expected to create demand traction in the ownership and built-to-rent housing segments. In recent years, corporate balance sheets have improved due to ample liquidity, market consolidation, alternative funding avenues, and heavy debt servicing.
Consequently, the market is experiencing a supply catch-up to meet the soaring demand for mid-priced and luxury housing, while the weakening demand for affordable housing represents a spoiler alert.
The RBI’s decision to keep the repo and the reverse repo rates unchanged was aligned with the market expectations. The decision signifies that we are close to the end of the rate hike cycle. The market has been pricing in rate cuts starting from February to April of 2024.
For retail investors, this is a good time to lock in their desired fixed-income allocation in bank FDs. 10 year Gsec yields after having fallen to 7% in June have risen to 7.2% in August. Investing in long duration debt funds can also be a good strategy. As the interest yields start falling, the capital appreciation of long duration bonds can give good returns.
For home loan borrowers, fixed-rate loans may be available in the market at some discount compared to floating-rate loans. However, since rate cuts are expected in the foreseeable future, it is better to continue with floating interest rate loans for now, said Anshul Gupta, Co-Founder and CIO, Wint Wealth.
Our banks remain healthiest in more than a decade with historically high levels of capital, declining levels of non-performing assets and rising profitability. Corporate balance sheets are robust, with lower leverage, improving debt servicing capacity and strong profitability, said RBI Governor Shaktikanta Das.
The Reserve Bank of India (RBI) has left the key interest rate unchanged for a third straight meeting on Thursday during the bi-monthly MPC meeting. The central bank held the benchmark repurchase rate at 6.50% Thursday. The repo rate is the rate of interest at which RBI lends to other banks. Read full text of RBI Governor Shaktikanta Das' policy speech here
The Reserve Bank of India has released a key proposal with the goal of improving both the flexibility and transparency of rates of interest on variable-interest rate loans. It is proposed to put in place a transparent framework for reset of interest rates on floating interest loans. How will it impact home loan borrowers? Click here to know
As widely anticipated, the RBI has decided to keep the repo rates unchanged at 6.5%. India continues to outperform other countries in terms of consumption and with the festive season coming up, the RBI will not risk denting it.
This is nothing but good news for aspiring homebuyers on the market for a purchase in the near future. The unchanged repo rate will help maintain the momentum in housing sales - particularly in the mid and luxury segments, which did significantly well in H1 2023.
The RBI governor's decision to maintain unchanged policy rates, as widely anticipated, was overshadowed by a notable upward revision in the inflation forecast.
Additionally, the implementation of a 10% incremental Cash Reserve Ratio (CRR) on the growth in Net Demand and Time Liabilities (NDL) between May 19 and July 28 for banks added to the market's unease. Despite these developments, the policy shift did not significantly impact market sentiments, says Santosh Meena, Head of Research at Swastika Investmart Ltd.
Presently, the market sentiment appears to be largely unaffected by the policy changes. However, the short-term market structure seems to lean towards a sell-on-rise pattern. This is partly due to the global market's nervousness, exacerbated by the jump in crude oil and other commodity prices, posing notable challenges for the Indian market, he added.
The RBI Governor Shaktikanta Das said that the cumulative rate hike of 250 bps from FY23 is working its way through the economy. The repo rate increase cycle was paused in April this year after six consecutive rate hikes aggregating to 250 basis points since May 2022.
Further, RBI Governor Das said that India's strong macroeconomic fundamentals have held to strong growth. He said that India is contributing approx 15% to global growth. "Banks remain healthiest with historic high levels of capital," Governor Das added. Read here
Tthe Reserve Bank of India decided to keep repo rate steady at 6.50% for third time in a row. After the announcement of RBI MPC meeting outcome, stock market experts have predicted volatility in interest rate sensitive segments like banking, NBFC, auto, real estate and infrastructure.
However, they said that any dip in quality stocks of these segment should be seen as buying opportunity by positional investors. Read here
The Reserve Bank of India (RBI) will allow offline payment of UPI by using near-field communication. The central bank raised payment limit via UPI lite to ₹500 from ₹200. Read more
Maintaining policy rates will bolster consumer demand amid moderate inflation, further promoting economic growth. This stance will likely boost homebuyers’ confidence as affordability remains stable. Since the interest rate upcycle, the repo rate has been hiked by 250 bps, resulting in 160 bps rise in home loan rates.
We remain cautious about the housing market, especially the affordable and the mid segment that is price sensitive and has seen some impact of the previous rate hikes. However, a long pause in the policy rate will be supportive to the housing market.
The decision to maintain the policy rate unchanged at 6.50% displays the steadfast and vigilant stance of the monetary policy committee. The focus on withdrawal of accommodation is likely to continue with stickiness in inflationary pressure due to expectation of a sub-normal to normal monsoon. While the current vegetable price growth is expected to bring headline inflation above the tolerance band, a likely reversion to mean of the same and a long-term view of balancing growth amidst this temporary inflation rise kept RBI in status quo mode.
It is a cautious wait and watch policy, with macros having turned negative since last announcement in June. Oil prices, food prices have all gone up. Inflation expectations have gone up as well. RBI has imposed additional cash reserve requirement on incremental bank deposits.
In July CPI headline reading will go up to close to 6.50%. Next few months would be a good opportunity to add duration to the portfolio with a 12 month investment horizon. It would be difficult for risky assets to perform in face of the headwinds caused by tight monetary and financial conditions.
Despite raising the near-term inflation estimate, the RBI kept the longer-term inflation estimate unchanged. This implies that the RBI views the current inflation spike as transitory. This explains why the RBI maintained the status quo on policy rate action.
The temporary incremental CRR increase is a reaction to the sharp increase in systemic liquidity overhang, which is attributed primarily to the demonetization of ₹2,000 notes. We expect this measure to be reversed as systemic liquidity approaches balance.
At the same time, we believe that by maintaining its liquidity tightening stance, the RBI maintained its concern about upside inflation risk. If the RBI's current assessment of inflation as transitory holds true, we expect the RBI to maintain the status quo for the next year. If inflation exceeds the RBI's forecast in the near term, another 25-bps rate hike is not out of the question. The measures are favourable in the short term for rate-sensitive industries.
While in line with consensus RBI has kept its policy rate unchanged, in view of the surplus liquidity and perhaps to deliver an implicit hike (of lesser impact), RBI has temporarily increased the CRR levels by 10% of incremental NDTL of banks. This in effect takes out the 10% of surplus in the accumulated from ₹2,000 note withdrawal and FX operations (~ ₹300-350 billion).
Notably, inflation estimates, especially near term estimates (Q2, Q3) have been revised upwards meaningfully, while growth estimates are retained. Furthermore, Q1FY25 inflation estimate of 5.2% and governor reiterating, commitment to align to 4% on a durable basis, suggests that rate cuts are out of way beyond the near term. Higher for longer is not just for the external world but also for India.
Domestic growth resilience is countered by external risks and inflation. RBI is not ruling out hikes if necessary, clearly cuts are out of sight.
The MPC has delivered in line with market expectations on rates, stance and tone, with retention of rates and stance and the tone turning hawkish. The significant change is the upward revision in FY24 CPI inflation projection from 5.1% to 5.4%. This means the high policy rates will remain high for long and, therefore, a rate cut can be expected only in Q1 FY25. From the market perspective, there are no positive or negative surprises in the policy.
RBI has kept the policy rate unchanged at 6.5% in the recent MPC meet. The inflation may not cause worries (excluding CPI). The CPI forecast for FY24 has raised to 5.4% from 5.1% estimated earlier. Moreover, the real GDP growth forecast was pegged at 6.6%. RBI MPC remains resolute in its commitment to align inflation with the 4% target and anchor inflation expectations.
We have made good progress in sustaining India’s growth momentum. While inflation has moderated, the job is still not done. Inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions and weather-related uncertainties.
I reiterate our commitment to align CPI inflation to the 4 per cent target on a durable basis. We do look through idiosyncratic shocks, but if such idiosyncrasies show signs of persistence, we have to act, said RBI Governor Shaktikanta Das.
A Public Tech Platform for Frictionless Credit delivery is being developed by the Reserve Bank Innovation Hub.
The Platform is intended to be rolled out as a pilot project in a calibrated manner. It will have an open architecture and open Application Programming Interface (API) and Standards, to which all financial sector players can connect seamlessly.
This initiative will accelerate the penetration of credit to hitherto underserved regions and further deepen financial inclusion, said RBI Governor Shaktikanta Das.
The RBI has revised the extant regulatory framework for Infrastructure Debt Funds (IDFs).
The key changes in the revised framework are: (i) withdrawal of the requirement to have a sponsor for the IDFs; (ii) allowing IDFs to finance toll-operate-transfer (ToT) projects as direct lenders; (iii) permitting IDFs to raise funds through ECBs; and (iv) making tri-partite agreements optional for PPP projects.
These changes are expected to further augment the capacity for infrastructure financing in the country, said RBI Governor Shaktikanta Das.
The RBI Governor Shaktikanta Das-led monetary policy committee (MPC) unanimously decided to keep the repo rate unchanged at 6.50% for the third straight meeting in a row. The MPC also decided to keep the policy stance unchanged as ‘Withdrawal Of Accommodation’. Check out the key highlights of RBI's August policy meeting here
RBI has proposed to put in place a transparent framework for reset of interest rates on floating interest loans. The framework will require Regulated Entities to (i) clearly communicate with borrowers for resetting the tenor and/or EMI; (ii) provide options for switching to fixed rate loans or foreclosure of loans; (iii) disclose various charges incidental to the exercise of the options; and (iv) ensure proper communication of key information to borrowers.
These measures will further strengthen consumer protection, said RBI Governor Shaktikanta Das.
The Indian equity indices Sensex and Nifty fell over half a percenr each after the RBI kept the repo rate unchanged at 6.5%. RBI Governor Shaktikanta Das retained FY24 GDP growth projections at 6.5%, but raised the CPI inflation forecast for FY24 to 5.4%.
The RBI has proposed conversational payments in UPI. The central bank is introducing offline payments in UPI using near field tech via UPI Lite. The transaction limit for small value payments in offline mode has been enhanced to ₹500 from ₹200, announced RBI Governor Shaktikanta Das.
RBI Governor Shaktikanta Das on Thursday's MPC meeting said that the withdrawal of the ₹2,000 note is a temporary measure. Once the complete withdrawal of ₹2,000 denomination from the country, there will be "adequate liquidity" in the system. Governor Das added.
In May this year, the Reserve Bank of India (RBI) decided to withdraw ₹2,000 denomination banknotes from circulation and said that all the notes must be exchanged before September 30. Read here
The banks will have to maintain an incremental CRR of 10% on the increase in their NDTL between May 19 and July 28, starting fortnight August 12, announced RBI Governor Shaktikanta Das.
The CPI inflation for the April-June quarter of 2024 is projected at 5.2%, said RBI Governor Shaktikanta Das.
CPI inflation forecast for FY2023-24 has been raised to 5.4% from 5.1%, says RBI Governor Shaktikanta Das.
- CPI inflation forecast for Q2FY24 raised to 6.2% from 5.2%
- CPI inflation forecast for Q3FY24 raised to 5.7% from 5.4%
- CPI inflation forecast for Q4FY24 retained at 5.2%
The GDP growth forecast for April-June 2024 is pegged at 6.6%, said RBI Governor Shaktikanta Das
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