The central bank has rightly decided to wait for the monetary transmission data from the earlier hikes to take further action.
The Monetary Policy Committee (MPC) met on the 8th, 9th, and 10th of August 2023. After detailed deliberation on all relevant aspects, it was decided unanimously to keep the market exchange rate policy repo rate unchanged at 6.50 percent in terms of GDP. Consequently, the standing deposit facility (SDF) rate remains at 6.25 percent, and the marginal standing facility (MSF) rate and the bank rate are at 6.75 percent. By a majority of 5 out of 6 members, the MPC also decided to remain focused on withdrawing accommodation to ensure that inflation progressively aligns with the target, while supporting growth.
There is an upward bias for inflation and it is projected less from Q3. The real GDP growth for 2023-24 is projected at 6.5 percent with Q1 at 8.0 percent; Q2 at 6.5 percent; Q3 at 6.0 percent; and Q4 at 5.7 percent. Real GDP growth for Q1: 2024-25 is projected at 6.6 percent.
The latest CPI inflation projections for 2023-24, assuming a normal monsoon, are revised to 5.4 percent, with Q2 at 6.2 percent; Q3 at 5.7 percent; and Q4 at 5.2 percent. CPI inflation for Q1: 2024-25 is projected at 5.2 percent. The RBI is looking at vegetable prices becoming lower.
There has been an announcement that from the fortnight beginning 12th August 2023, scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10 percent till 8th September 2023. This is due to the ₹2000 rupee note deposited with the bank. This will be hitting the Q2 numbers for banks.
On the positive side:
1. Foreign exchange reserves have crossed the US $600 billion mark.
2. Greater transparency in interest rate reset of Equated Monthly Instalments (EMI) based floating interest loans – which will be a game changer.
3. Conversational payments and offline capability on UPI; enhancement in transaction limit of small value offline digital payments.
4. Public tech platform for frictionless credit.
Virat Diwanji, Group President and Head of Consumer Bank, Kotak Mahindra Bank says that “The RBI’s decision to keep the repo rates on hold, but with a “ready to act” message was widely expected since the inflation, driven by vegetable prices, has been on a spiral since June. While the food prices are expected to temper from September onwards, the core inflation remains sticky. RBI’s inflation outlook for a period up to Q1: FY25 has been revised upwards, thus indicating a rate cut is further away on the horizon. Even though our domestic economic outlook is robust, the global factors – especially the El Niño factor in the September-October period may influence the next year’s crop outlook.”
The move to cut the temporary liquidity overhang from the return of ₹2000 banknotes through an Incremental CRR of 10% will help the price stability. These funds are expected to return to the system ahead of the festival season, boosting domestic consumption.
The central bank has rightly decided to wait for the monetary transmission data from the earlier hikes to take further action.
