RBI MPC Meet - December 2022 Outcome

RBI MPC MEET December 2022

In RBI MPC Meet - December 2022, RBI’s six-member Monetary Policy Committee voted to hike the policy repo rate by 35 bps to 6.25%. Accordingly, standing deposit facility (SDF) rate stands adjusted to 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Growth outlook:

• Real GDP growth for FY23 is now projected at 6.8% (revised lower from earlier expectations of 7%) Q3FY23 projection at 4.4% v/s 4.6% earlier
• Q4FY23 at 4.2% v/s 4.6%
• Q1FY24 at 7.1% v/s 7.2%
• Q2FY24 at 5% v/s ---

Inflation expectations:

• Inflation is projected at 6.7% in FY23 (maintained at similar levels compared to last MPC meeting)
• Q3FY23 at 6.6% v/s 6.5%
• Q4FY23 at 5.9% v/s 5.8%
• Q1FY24 at 5% v/s 5%
• Q2FY24 at 5.4% v/s ----

Rationale behind decision on policy rate and stance:

These decisions are in consonance with the RBI’s objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. On global scale inflation remains elevated and persistent across countries as they grapple with food and energy price shocks and shortages. More recently, however, there are some signs of moderation in price pressures, which have raised expectations of an easing in the pace of monetary tightening. Domestically, CPI inflation moderated to 6.8% (y-o-y) in October 2022 from 7.4% in September, with favourable base effects mitigating the impact of pick-up in price momentum in October. Food inflation softened, aided by easing inflation in vegetables and edible oils, despite sustained pressures from prices of cereals, milk and spices. Fuel inflation registered some easing in October, driven by softening of price inflation in LPG, kerosene (PDS) and firewood and chips. Core CPI (i.e., CPI excluding food and fuel) inflation persisted at elevated levels at 6%, with price pressures across most of its constituent sub-groups. The inflation trajectory going ahead would be shaped by both global and domestic factors. In case of food, while vegetable prices are likely to see seasonal winter correction, prices of cereals and spices may stay elevated in the near-term on supply concerns. High feed costs could also keep inflation elevated in respect of milk. Adverse climate events – both domestic and global – are increasingly becoming a significant source of upside risk to food prices. RBI observed that imported inflation risks from the US dollar movements need to be watched closely.

RBI expects global growth to lose momentum as monetary policy actions tighten financial conditions and as consumer confidence weakens with the rising cost of livelihood. On the domestic front, real gross domestic product (GDP) increased by 6.3% (y-o-y) in Q2:2022-23 after an increase of 13.5% in Q1. In Q3, economic activity is exhibiting resilience. Urban demand has remained buoyant, and rural demand is recovering. Investment activity is in modest expansion. Merchandise exports contracted in October after an expansion for 19 consecutive months. Growth in non-oil non-gold imports decelerated. On growth, the agricultural outlook has brightened, with the prospects of a good rabi harvest. The sustained rebound in contactintensive sectors is supporting urban consumption. Robust and broad-based credit growth and government’s thrust on capital spending and infrastructure should bolster investment activity. According to the RBI’s survey, consumer confidence is improving. The economy, however, faces accentuated headwinds from protracted geopolitical tensions, tightening global financial conditions and slowing external demand. Taking into consideration, the MPC is of the view that, further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the core inflation persistence and contain second round effects, so as to strengthen medium-term growth prospects. Five members voted for 35 bps rate hike, whine one member voted against repo rate action.

RBI Monetary policy says- the overall liquidity remains in surplus, with average daily absorption under the liquidity adjustment facility (LAF) at ₹1.4 lakh crore during October-November as compared with ₹2.2 lakh crore in August-September. On a y-o-y basis, money supply (M3) expanded by 8.9 per cent as on November 18, 2022 while bank credit rose by 17.2 per cent. India’s foreign exchange reserves were placed at US$ 561.2 billion as on December 2, 2022.

Developmental and Regulatory Policies

SLR Holdings in Held to Maturity (HTM) category: With a view to enable banks to better manage their investment portfolios, it has been decided to extend the dispensation of enhanced HTM limit of 23 per cent up to March 31, 2024 and allow banks to include securities acquired between September 1, 2020 and March 31, 2024 in the enhanced HTM limit. The HTM limits would be restored from 23 per cent to 19.5 per cent in a phased manner starting from the quarter ending June 30, 2024.

Enhancements to Unified Payments Interface (UPI) – Processing Mandates with Single-Block-andMultiple-Debits: RBI decided to introduce a single-block-and-multiple debits functionality in UPI, which will significantly enhance the ease of making payments in e-commerce space and towards investments in securities. Separate instructions to NPCI will be issued shortly.

Expanding the Scope of Bharat Bill Payment System (BBPS) to include all Payments and Collections: RBI decided to expand the scope of BBPS to include all categories of payments and collections, both recurring and non-recurring in nature. This will make the platform accessible to a wider set of individuals and businesses who can benefit from the transparent and uniform payments experience, faster access to funds and improved efficiency. Separate guidelines will be issued to NBBL in this regard.

Hedging of Gold Price Risk in the International Financial Services Centre (IFSC): RBI has decided to permit resident entities to hedge their gold price risk on recognised exchanges in the International Financial Services Centre (IFSC). The related instructions will be issued separately.

Our Views: In the Latest RBI MPC Meet, the MPC decision to hike rates came in the backdrop of stubbornly high inflation, which has remained above the central bank's target for 10 consecutive months and is broadly in line with our expectations. The inflation may have peaked but moderation may be gradual or patchy going ahead due to various external factors. The stance also kept unchanged – withdrawal of accommodation as core inflation still remains above RBI”s tolerance levels. With the latest hike, the repo rate has gone up by 225 bps in the current rate hike cycle.

The minutes of the MPC’s meeting will be published on December 21, 2022.
The next meeting of the MPC is scheduled during February 6-8, 2023.

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