RBI’s six-member Monetary Policy Committee voted to keep the repo rate unchanged in its first meeting of FY2023. Repo rate stood unchanged at 4%. The RBI monetary policy stance remains ‘Accommodative’ while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. MSF rate and Bank rate remains unchanged at 4.25%. RBI restores width of LAF corridor to 50 bps the position that prevailed before the pandemic. The floor of the corridor will now be provided by the newly instituted standing deposit facility (SDF), which will be placed 25 basis points below the repo rate, i.e., at 3.75%. ⎫ The fixed rate reverse repo (FRRR) rate is retained at 3.35%. It will remain as part of RBI’s toolkit and its operation will be at the discretion of the RBI for purposes specified from time to time.
What is SDF?
SDF allows the RBI to absorb liquidity from commercial banks without giving G-sec in return to the banks. RBI uses this when it has to absorb tremendous amount of money from the banking system. Through reverse repo window mechanism it becomes difficult for RBI to provide such volume of G-sec’s in return. SDF instrument was used during the time of demonetization.
Rationale behind decision on policy rate and stance:
The RBIN monetary policy 2022 opines that positive benefits from the ebbing Omicron wave have been offset by the sharp escalation in geopolitical tensions. This has significantly changed the external and domestic landscape given the existing Monetary Policy in India. Concerns over protracted supply disruptions have rattled global commodity and financial markets, given the significant share of the two economies engaged in war in global production and exports of key commodities like oil and natural gas; wheat and corn; palladium, aluminium and nickel; edible oils; and fertilisers. Global crude oil prices briefly crossed US$ 130 per barrel, touching their highest level since 2008 and remain volatile at elevated levels, despite some correction. Global food prices along with metal and other commodity prices have also hardened significantly. Risk aversion towards assets of emerging market economies (EMEs) has increased leading to large capital outflows and a depreciating bias in their currencies. These developments have, first, ratcheted up the projections of global inflation, which was already running well above targets in major countries; and second, will produce sizeable adverse impact on output across geographies. Global supply chain disruptions and input cost pressures are now expected to linger even longer. The resurgence of COVID-19 infections in some major economies in March and the associated lockdowns run the risk of further aggravating the global supply bottlenecks and input cost pressures. World trade and output and hence external demand are likely to be weaker than envisaged two months ago. Overall, the external developments during the past two months have led to the materialization of downside risks to the domestic growth outlook and upside risks to inflation projections presented in the February MPC resolution. Inflation is now projected to be higher and growth lower than the assessment in February. Economic activity, although recovering, is barely above its pre-pandemic level. Against this backdrop, the MPC decided to retain the repo rate at 4%. It also decided the Monetary Policy in India remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
RBI took following steps
- Revised inflation and growth projections
- In sequence of priority inflation is given priority over growth
- LAF corridor normalized
- SDF is introduced and it will be bottom of corridor
- Liquidity withdrawal will be done in multiyear time frame
- Situation is dynamic and fast changing and our actions will be tailored accordingly
Growth outlook:
- Real GDP growth for FY23 is now projected at 7.2%
- Revised downwards from earlier expectations of 7.8%)
- Q1FY23 projection at 16.2% v/s 17.2% earlier
- Q2FY23 at 6.2% v/s 7%
- Q3FY23 at 4.1% v/s 4.3%
- Q4FY23 at 4% v/s 4.5%
A key assumption for this is crude oil prices of Indian basket at USD 100 per barrel during FY23.
Inflation expectations:
Heightened geopolitical tensions since end-February have, upended the earlier narrative and considerably clouded the inflation outlook for the year.
Inflation is now projected at 5.7% in FY23 (revised upwards from earlier expectations of 4.5%)
- Q1FY23 at 6.3% v/s 4.9%
- Q2FY23 at 5.8% v/s 5%
- Q3FY23 at 5.4% v/s 4%
- Q4FY23 at 5.1% v/s 4.2%
RBI expects monsoon to be normal in FY23 and this is reflected in the Monetary Policy Rate.
Governor policy statement says, “Given volatility in global crude oil prices and extreme uncertainty over the evolving geo-political tensions, any projection of growth and inflation is fraught with risk and is largely contingent upon future oil and commodity price developments. On our part, let me assure all stakeholders that as in the past, the Reserve Bank will use all its policy levers to preserve macroeconomic stability and enhance the resilience of our economy. The situation is dynamic and fast changing and our actions have to be tailored accordingly.”
It further mentions that the RBI Monetary policy 2022 will continue to engage in a gradual and calibrated withdrawal of this liquidity over a multiyear time frame in a non-disruptive manner beginning this year. The objective of the Monetary policy rate is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy. RBI remains focused on completion of the borrowing programme of the Government and towards this end the RBI will deploy various instruments as warranted.
Other measures:
The risk weights for individual housing loans were rationalised in October 2020 by linking them only with loan to value (LTV) ratios for all new housing loans sanctioned up to March 31, 2022. Recognizing the importance of the housing sector and its multiplier effects, it has been decided to extend the applicability of these guidelines till March 31, 2023. This will facilitate higher credit flow for individual housing loans.
SLR holdings in HTM category:
With a view to enable banks to better manage their investment portfolio during FY23, it has been decided to enhance the present limit under Held to Maturity (HTM) category from 22% to 23% of NDTL till March 31, 2023. It has also been decided to allow banks to include eligible SLR securities acquired between April 1, 2022 and March 31, 2023 under this enhanced limit. The HTM limits would be restored from 23% to 19.5% in a phased manner starting from the quarter ending June 30, 2023.
Discussion Paper on Climate Risk and Sustainable Finance:
To facilitate better understanding and assessment of the potential impact of climate-related financial risks by Regulated Entities, a Discussion Paper on Climate Risk and Sustainable Finance will be published shortly for feedback. Given its far reaching ramifications, the Monetary policy in India should prepare the country for the effects of global climate change.
Committee for review of Customer Service Standards in RBI Regulated Entities
In view of the transformation underway in the financial landscape due to innovations in products and services, deepening of digital penetration and emergence of various service providers, The RBI monetary policy 2022 proposed to set up a committee to examine and review the current state of customer service in the RBI Regulated Entities, adequacy of customer service regulations and suggest measure to improve the same.
Interoperable Card-less Cash Withdrawal at ATMs:
At present, the facility of card-less cash withdrawal through ATMs is limited only to a few banks. The RBI monetary policy 2022 now proposes to make card-less cash withdrawal facility available across all banks and ATM networks using the UPI. In addition to enhancing ease of transactions, the absence of the need for physical card for such transactions would help prevent frauds such as card skimming, card cloning, etc.
Bharat Bill Payment System – Rationalization of Net-worth Requirement for Operating Units
Bharat Bill Payment System (BBPS), an interoperable platform for bill payments, has seen an increase in the volume of bill payments and billers over the years. The RBI Monetary policy seeks to further facilitate greater penetration of bill payments through the BBPS and to encourage participation of a greater number of non-bank Bharat Bill Payment Operating Units in the BBPS, it is proposed to reduce the net worth requirement of such entities from INR 100 crore to INR 25 crore.
Cyber Resilience and Payment Security Controls of Payment System Operators (PSOs):
Payment systems play a catalytic role in facilitating financial inclusion and promoting financial stability. To ensure that our payment systems remain resilient to 10 conventional and emerging risks, specifically those relating to cyber security, it is proposed to issue guidelines on Cyber Resilience and Payment Security Controls for Payment System Operators.
Our Views:
As expected the Repo rate has been kept unchanged however as per the RBI Monetary Policy, while keeping stance Accommodative, it has said that going ahead it will be focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Risks to RBI’s growth and inflation assumptions remains high if crude oil and other commodities prices continue to rise due to prolonged geopolitical tensions.
Mangesh Kulkarni | Research Analyst
Tel: 91-22-67526636
Email: mangesh.kulkarni@almondzadmin
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