RBI’s August 2023 Policy – On Expected Lines

Dr. Manoranjan Sharma, Chief Economist, Infomerics Ratings

This Policy is on expected lines. Low global growth is on because of geo-politics-high inflation, deteriorating financial conditions, Russia Ukraine war and growing economic fragmentation. The financial system is constrained by higher inflation, rising interest rates and stress in financial markets.

In view of global cues, improved crop sowing, uneven monsoon, good industrial growth, buoyant services activity, buoyant aggregate demand conditions, rising investment activity, and 2 % CAD, real GDP growth for 2023-24 is 6.5 %.

Higher food inflation in July occurred because of increase in prices of vegetables, particularly tomato prices and further increase in prices of cereals and pulses. 

Uncertainties also stem from El Niño conditions, global food prices and crude oil prices raising annual inflation projection to 5.4 %. But we are confident that retail inflation would be contained within the RBI’s upper threshold level of 6 %. 

Surplus liquidity rose to ₹ 1.7 lakh crore to ₹ 1.8 lakh crore because of return of ₹2000 banknotes, RBI’s surplus transfer to the government, pick up in government spending and capital inflows. Hence the RBI move to bring 10% ICRR for lenders to absorb surplus liquidity makes sense in view of the surplus liquidity in the system due to various factors, including the deposit of Rs 2,000 currency notes. As the Governor rightly pointed out “Even after the temporary ICRR, there will be adequate liquidity in the system to meet the credit needs of the economy”.

The proposed framework for the transparent reset of home loan rates and EMIs is also contextually significant and greatly welcome because of the inherent difficulties in resetting home loans.

With growth in bank credit, low NPAs and adequate capital and liquidity buffers, the Indian financial sector is stable and resilient. 

In view of the evolving macro-economy and the trade-off between growth and inflation, the RBI rightly kept the rates and stance unchanged. Right call!