The Reserve Bank of India’s Monetary Policy Committee (MPC) unanimously decided to keep the benchmark repo rate unchanged at 6.5% while maintaining its stance of withdrawal of accommodation.
In his statement, RBI Governor Shaktikanta Das emphasized that the global economy is experiencing a slowdown amidst tightening financial conditions, lingering geopolitical tensions and increasing fragmentation. However, the Indian economy continues to showcase resilience on the back of its strong fundamentals.
On the domestic environment, the Governor observed that high frequency indicators point to sustained momentum across sectors. The MPC took note of the robust expansion seen in services activity, strong credit growth, buoyant tax collections, rebound in capacity utilization, government’s continued infrastructure push and supply chain repairs. However, the MPC decided to keep rates on hold given the 250 basis points hike undertaken so far whose full effects are still unfolding.
Growth and Inflation
On India’s growth outlook, the Governor expects the economy to expand at 6.5% in 2023-24, with Q2 at 6.5%, Q3 at 6.0% and Q4 at 5.7%. The MPC assessed risks to the growth trajectory as evenly balanced at this juncture.
Upside risks emerge from sustained demand for services, robust credit expansion, healthy corporate balance sheets, easing input costs and government’s focus on capital spending, he said.
However, downside uncertainties stem from the global slowdown, rising recession risks in key economies, protracted geopolitical tensions, uneven monsoon and volatile financial markets.
On the inflation front, the statement highlighted that near-term inflation is set to moderate on the back of vegetable price correction and cut in LPG rates. However, kharif crop patterns, pressures from cereals, pulses and edible oil prices, risks from adverse weather conditions and global commodity prices will shape the path ahead, the governor said in his statement.
The MPC projects headline CPI inflation at 5.4% for 2023-24, with Q2 at 6.4%, Q3 at 5.6% and Q4 at 5.2%. The Governor emphasized that the inflation outlook is contingent on multiple uncertainties tied to monsoon, global food and energy costs and geopolitical tensions.
Liquidity Management and Financial Markets
On liquidity management, the Governor noted that excessive liquidity risks both price and financial stability. As a temporary measure, the RBI had imposed an incremental CRR of 10% on bank deposits to rebalance systemic liquidity.
With the phased rollback of the additional CRR starting from October 7, the Governor signaled that going forward, the RBI will consider using open market operation (OMO) sales as a tool to manage durable liquidity conditions in alignment with the policy stance.
To improve monetary transmission, the Governor advised banks to actively participate in inter-bank markets rather than passively park surplus liquidity under the standing deposit facility. Higher call money market activity would correct the lopsided distribution of liquidity across the banking system.
On financial markets, the Governor observed that the yield curve has undergone some repricing recently reflecting global tightening of financial conditions. However, stable term spreads in the government securities market point to steady financial conditions domestically so far.
External Sector Developments
On global dynamics, merchandise exports and imports remain in contraction zone, pointed out Das, although the pace of decline has moderated. Service exports continue to be a bright spot backed by strong growth in software and IT services, he noted. “Remittance inflows have also been resilient.”
Meanwhile, he said, India’s current account deficit narrowed to 1.1% of GDP in Q1 2023-24 from 2.1% last year due to moderation in trade deficit. The Governor reiterated that India’s external sector remains manageable given the healthy foreign exchange reserves position, which stood at $586.9 billion as on September 29th.
Additional Measures
The monetary policy statement announced several additional measures across spheres of financial regulation, payments ecosystem and consumer protection.
To strengthen project financing norms across regulated entities, the RBI plans to issue harmonized guidelines on the framework for loans given to projects under implementation.
To boost credit risk transfer by NBFCs, the RBI has decided to permit NBFCs in the middle and lower layers also to use credit risk mitigation tools to reduce counterparty exposures.
For improving last-mile digital payments acceptance, the RBI will expand the scope of the Payments Infrastructure Development Fund by 2 more years till 2025. It will also onboard emerging payment modes like soundbox-based acceptance.
To further facilitate card tokenization, the RBI will enable card-on-file tokenization directly at the card issuer level, enhancing ease of creating tokens for consumers.
The RBI also proposes to recognize Self-Regulatory Organisations (SROs) for regulated entities to strengthen compliance and best practices. An omnibus framework will be issued soon for stakeholder feedback.
For improving consumer grievance redress, the RBI aims to come out with a unified Internal Ombudsman framework covering banks, NBFCs and credit bureaus.
Policy Stance and Guidance
In conclusion, the MPC has adopted a balanced approach, keeping rates unchanged while maintaining its stance of withdrawal of accommodation. The focus unequivocally remains on bringing inflation within the target tolerance band in a durable manner, while supporting growth.
The Governor reiterated RBI’s flexible, data-driven approach, emphasizing that policy will dynamically adapt in response to incoming data and evolving conditions. The central bank remains alert, agile and prepared to act as warranted to align inflation with the target while safeguarding macroeconomic and financial stability.
The policy stance signals the RBI’s commitment to break the persistence of core inflation and firmly anchor expectations around the 4% target. The guidance indicates withdrawal of accommodation to continue until inflation exhibits a durable slide towards the mid-point of the target band.
At the same time, the RBI stands ready to act as may be necessary to deal with any global spillovers, volatility and disconnect between food and fuel prices relative to underlying inflation trends, he noted.