Tag: RBI

Posted in economics

RBI’s August 2023 Policy – On Expected Lines

Posted on by InsPIRE

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!

Posted in economics

RBI Pauses Repo Rate Hike – Will it be One-off or a Long Pause?

Posted on by InsPIRE

Dr Debesh Roy, Chairman, InsPIRE

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on 6 April 2023 unanimously decided to keep the policy repo rate unchanged at 6.5%, “with readiness to act, should the situation so warrant” as clarified by Mr. Shaktikanta Das, Governor, RBI. While major central banks across the world, viz., the US Federal Reserve, Bank of England, European Central Bank, etc., are continuing to tighten monetary policy, albeit at a reduced pace, RBI pressed the pause button.

The RBI has increased the policy repo rate cumulatively by 250 bps in the last 11 months starting May 2022, which was preceded by the introduction of the Standing Deposit Facility (SDF) at a rate 40 bps higher than the fixed rate reverse repo. Therefore, there has been a 290 bps effective rate hike since April 2022. These increases have been fully transmitted to the overnight weighted average call money rate (WACR), the operating target of monetary policy, which has gone up from daily average of 3.32% in March 2022 to 6.52% in March 2023. Hence, the RBI felt it was necessary to evaluate the cumulative impact of these rate hikes. Therefore, the RBI Governor asserted that “it’s pause, not a pivot.”

Further, the MPC in a 5:1 majority decided “to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth”. The RBI Governor argued that “since the inflation rate was above the target and given its current level, the present policy rate could still be regarded accommodative”. In this context, the State Bank of India (SBI) research bulletin Ecowrap, has averred that “RBI has made a clear distinction between policy strategy and policy stance once again and asserted that these can coexist simultaneously. While it has kept the stance same as ‘withdrawal of accommodation’ to calibrate liquidity and ensure that government borrowings face no disruption, its strategy has been changed by hitting the pause button on rate hike”.

The  MPC decided to marginally reduce the consumer price index (CPI) inflation forecast for 2023-24 from 5.3% to 5.2%, assuming a lower annual average crude oil price at $85 per barrel, compared to $90 per barrel earlier, coupled with a normal monsoon. Within a week of the announcement of the monetary policy, the National Statistical Office (NSO)  announced the easing of retail inflation to a 15-month low of 5.66% in March 2023 from 6.44% in the previous month, due to continued moderation in food, fuel, housing and services prices. The retail inflation figure came within RBI’s upper tolerance limit of 6% for the first time in 2023. Importantly, core inflation (which excludes food and fuel inflation) dropped to 5.66% in March 2023 from 6.44% in February 2023, having remained sticky at 6% or above since September 2022. This could give the central bank breathing space for a longer  pause in rate hike. The trend in CPI inflation and core inflation vis-a-vis  repo rate is presented in the following chart.

The expected record rabi production, followed by good kharif production due to favourable monsoon – the first estimate of the India Meteorological Department (IMD), indicating normal monsoon at 96% of Long Period Average (LPA) (although the projection by Skymet indicates slightly below normal monsoon at 94% of LPA) – could lead to a lower inflation trajectory.

The real GDP growth for 2023-24 has been projected by RBI at 6.5 per cent with Q1:2023-24 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.1 per cent; and Q4 at 5.9 per cent, with risks evenly balanced. However, the IMF has cut India’s growth estimate for 2023-24 to 5.9% from 6.1%, citing lesser scope for pent-up demand due to historical revisions to data. The growth projections by Government of India’s Economic Survey, World Bank, ADB, S&P, OECD, ICRA and India Ratings for 2023-24 are 6.5% 6.3%, 6.4%, 6%, 5.9%, 6% and 5.9%, respectively. 

Headwinds like uneven monsoon or elevated crude oil prices at above $90 per barrel, due to the planned cut in production by the OPEC+ countries, could raise inflation, and result in one or two more rate hikes of 25bps each by the MPC during the current fiscal year, till another pause. However, if inflation continues to move southwards, due to record rabi production, normal monsoon,  favourable base effect, and international crude oil prices remaining within $85 per barrel, and also given the recent growth projections, we expect that there could be a long pause in repo rate by the RBI, instead of a one-off one. This could be followed by a rate-reduction cycle, starting as early as April  2024.  

Posted in economics

RBI Monetary Policy: Repo Rate Hike by 25 Bps, As Concerns for Core Inflation Remain

Posted on by InsPIRE

Dr Debesh Roy, Chairman, InsPIRE

The Reserve Bank of India (RBI) raised the policy repo rate by 25 basis points (bps) to 6.5% on 8th February 2023.  The Monetary Policy Committee (MPC) of the RBI in a 4:2 majority decision flagged the stickiness of core inflation as the reason behind the hike, although headline CPI inflation has been sliding below RBI’s upper tolerance limit of 6% since November 2022. Considering the slowdown in headline inflation, the hike in the repo rate has been reduced to 25 bps from 50 bps in October 2022 and 35 bps in December 2022. The observations of RBI Governor Shaktikanta Das that “we need to see a decisive moderation in inflation” could be an indication that the MPC is not done with the hike cycle yet. However, there could well be a pause in the repo rate in the next MPC meeting in April 2023, assuming further decline in retail inflation in January and February 2023.

The MPC has indicated a mixed outlook for inflation. It has stated that: “while prospects for the rabi crop have improved, especially for wheat and oilseeds, risks from adverse weather events remain.” The MPC also expects that commodity prices could face upward pressures with the easing of COVID-related mobility restrictions in some parts of the world. Further, the ongoing pass-through of input costs to output prices, especially in services, could continue to exert pressures on core inflation. The RBI’s enterprise surveys indicate some softening of input cost and output price pressures in manufacturing. In view of these factors and also assuming an average crude oil price (Indian basket) of US$ 95 per barrel, the MPC has projected inflation at 6.5% in 2022-23, with Q4 at 5.7%. Further, assuming a normal monsoon, CPI inflation is projected at 5.3% for 2023-24, with Q1 at 5.0 per cent, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.6%, and risks evenly balanced.

Further, MPC has projected real GDP growth for 2023-24 at 6.4% with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6.0% and Q4 at 5.8%, and risks broadly balanced. This could be possible due to the following factors: (i) Stronger prospects for agricultural and allied activities which could boost rural demand; (ii)The rebound in contact-intensive sectors and discretionary spending is expected to support urban consumption; (iii) Businesses and consumers surveyed by the RBI are optimistic about the outlook; (iv) Strong credit growth, resilient financial markets, and the government’s continued thrust on capital spending and infrastructure would create a congenial environment for investment. However, on the flip side, there could be an adverse impact on exports, due to tepid external demand on account of a slowdown in global activity.

Posted in economics

RBI’s June 2022 Monetary Policy : Driving Digitization

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Dr. Manoranjan Sharma, Chief Economist, Infomerics Ratings, Delhi & Advisor, InsPIRE

The RBI’s June 2022 Monetary Policy has justifiably been in the news for the hike in the Repo rate by 50 bps to 4.90 per cent, the withdrawal of the accommodative stance, the raising of the RBI’s inflation projections for FY 23 by 100 bps to 6.7 per cent, the evolving growth-inflation dynamics and the risks of un-anchoring of inflation and inflationary expectations to macro-economic stability. While all these are valid concerns, the issue of the renewed thrust on digitization has not quite received the attention it rightly deserves. The limited purpose of this brief piece is to highlight the impetus provided in this Policy to the inexorable forces of digitization, which are now sweeping the banking and financial world.

Considered in a proper historical and comparative perspective, digitization and disruption have altered the rules of the game and brought about a new normal in this VUCA (volatility, uncertainty, complexity and ambiguity) world.

The issues of disruptive innovations and domain knowledge together with big-picture issues facing industries and organizations have become commonplace. These competitive realities have blurred industry boundaries, transformed standard practice and rendered conventional blueprint of development obsolete making it necessary to leverage the power of the digital by extrapolating the unknown.

In this evolving socio-economic order, there have been game changing changes in data analytics, digitalization and disruption because of the confluence of innovation, big data, artificial intelligence (AI), machine learning (ML), deep learning (DL), robotics, analytics, internet and entrepreneurship.

Progressive digitalization is reflected in Direct Benefit Transfers (DBTs), the JAM Trinity (Jan Dhan, Aadhaar, Mobile- RuPay Cards) and Unified Payment Interface, Digital India initiative and literacy programmes.

India is surging to a digital-first economy to meet the “revolution of rising expectations”. This implacable process has significantly influenced employee empowerment, customer engagement, operational efficiency and business models. All four dimensions of technology- revenue, expense, experience and accuracy or compliance- impacting a company-have improved remarkably. Aadhar has become a unifying platform with performance transcending ‘reach’ and ‘legacy’.

Digitization has transformed the entire financial sector because of reduced costs and unimaginably higher scale. Factors driving banking digitisation include digitally evolved consumers; smartphone penetration and low cost internet connectivity; cheaper products / services using M-banking and Wallet; government and RBI initiatives like Digital India, UPI, Bharat QR, Aadhaar, Point of Sale (PoS) and equipped market players.

The adoption and adaptation of new technology and digital payments have transformed conventional banking and significantly enhanced banking outreach. Progressively rising digitization has transformed lending processes, viz., credit assessment and loan approval, disbursement, repayment and customer services. But there is certainly a long road to traverse, as, for example, reflected in the fact that at end-March 2020, banks lent ₹ 1.1 lakh crore digitally vis-à-vis ₹ 53.1 lakh crore physically; NBFCs had ₹ 23, 000 crore digital loans as against ₹ 1.9 lakh crore loan physically. Enhanced mandates on recurring payments via credit and debit cards from ₹ 5,000 to ₹ 15,000 per transaction will drive digitization.

Electronic payments lead to convenience, discounts, tracking spends, lower risk and enhance gains. Linking of RuPay credit cards to UPI network could expand the credit market from the present level of 50 million to about 250 million users (at present UPI has 250 million users and 50 million merchants on-boarded), i.e., a massive five-fold rise.

With this game-changing development, the UPI’s coverage would transcend debit cards and bank accounts to credit cards. While pricing remains an issue, permitting UPI-based payments to credit cards could divert some expenditure from CASA accounts to credit cards. This would drive boost card utilisation level and enhance spends per card for banks with a higher share of RuPay cards.

UPI-based payment more than doubled to ₹ 84.16 lakh crore in 2021-22 from ₹ 41.04 lakh crore in FY21. The overall credit outstanding against credit cards stood at nearly ₹1.5 lakh crore as on April 22, 2022. With this strategic measure, both convenience and short-term liquidity will be greatly facilitated. As Victor Hugo (1802-1885) said in a different context, this is “an idea, whose time has come”.

Real time data on turnover, customer profile, lifestyle, spend, customers customer’s instantaneous data can transform Indian fintech’s rapidly expanding space. This is doable with convergence of data, technology and money to transform lives of borrowers, investors and businesses. But cyber security emerges as a key concern, particularly with data moving data offline to the cloud.

Revamped digital ecosystem and the winds of change sweeping India provide an enabling environment to revolutionise India’s socio-economic landscape, similar in its range and sweep perhaps only to the mobile or the internet revolution. This onward march would thus positively influence both growth and distributive equity.

Posted in economics

Monetary Policy: RBI Retains Accommodative Stance, but Signals Beginning of Normalisation

Posted on by InsPIRE

Dr Debesh Roy, Chairman, InsPIRE

The Reserve Bank of India (RBI) retained its accommodative stance and kept policy rates unchanged in its latest monetary policy announced on 8 October 2021. However, the beginning of normalisation of policy stance by halting its bond-buying efforts, was evident.

The six-member Monetary Policy Committee (MPC), headed by Governor Shaktikanta Das, unanimously decided to retain the policy repo rate at 4% and the reverse repo rate 3.35%. However, all members, except one, voted to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward. The Governor made it clear: “We do realise that as we approach the shore; when the shore is so close, we don’t want to rock the boat because we realise there is a life, there is a journey beyond the shore”. 

However, the RBI decided to suspend the Government Securities Acquisition Programme (G-SAP), the Indian version of Quantitative Easing (QE) of the US. Through the G-SAP, RBI has  injected INR 2.2 trillion (USD 29.3 billion) of liquidity in the system [out of the total INR 2.37 trillion (USD 31.5 billion) injected through bonds], during the first six months of 2021-22. The central bank would absorb a higher quantum of liquidity gradually through its 14-day variable rate reverse repo (VRRR) auctions, from the current INR 4 trillion (USD 53.2 billion) to INR 6 trillion (USD 79.9 billion) in stages, by December 2021.

The Governor justified the suspension of G-SAP by stating: “Given the existing liquidity overhang, the absence of a need for additional borrowing for GST compensation and the expected expansion of liquidity in the system as Government spending increases in line with budget estimates, the need for undertaking further G-SAP operations at this juncture does not arise. The Reserve Bank, however, would remain in readiness to undertake G-SAP as and when warranted by liquidity conditions and also continue to flexibly conduct other liquidity management operations including Operation Twist (OT) and regular open market operations (OMOs)”.

Deputy Governor Michael D. Patra explained that RBI is still in passive liquidity mode and was accepting what the market was offering, and that the central bank aims to move to an active mode of liquidity management.

The RBI sharply moderated the outlook for CPI inflation during 2021-22 from 5.7% projected in the previous MPC meeting (04-06 August 2021) to 5.3%, due to easing of food prices, combined with favourable base effects. However, prices of crude oil which will remain volatile over uncertainties on the global supply and demand conditions, rising metals and energy prices, acute shortage of key industrial components and high logistics costs are adding to input cost pressures. The inflation projection for Q2 FY2021-22 was reduced from 5.9% to 5.1%; and 5.3% to 4.5% in Q3. The inflation projection, however, remained the same at 5.8% for Q4. The risks continued to remain broadly balanced. The inflation projection for Q1 2022-23 was raised from 5.1% to 5.2%.

Projection for India’s GDP growth rate by the MPC was at 9.5%, which was same as the previous projection. Domestic economic activity is expanding with the weakening of the second covid wave. With favourable prospects for kharif and rabi crops, rural demand is expected to be buoyant. Significant increase in the pace of vaccination and the forthcoming festival season, are expected to support a rebound in the pent-up demand for contact intensive services, and boost growth. Easy monetary and financial conditions would also support growth. Further,  the reforms undertaken by the government focusing on infrastructure development, asset monetisation, taxation, telecom sector and banking sector should push up investor confidence, enhance capacity expansion and facilitate crowding in of private investment. The production-linked incentive (PLI) scheme also augurs well for domestic manufacturing and exports.

However, downside risks to growth are global semiconductor shortages, elevated commodity prices and input costs, and potential global financial market volatility. Projection for Q2 GDP growth was raised from 7.3% in the previous MPC meeting to 7.9%. Q3 projection was retained at  6.3%, and 6.1% growth was retained for Q4. The real GDP growth for Q1 2022-23 was estimated at 17.2%, which is same as the previous projection.

Given the inflation expectations and growth projections for the current financial year, it is expected that the RBI would retain its accommodative stance at least till the MPC meeting in April 2022, while maintaining the policy repo rate at 4%. However, the next step for the central bank in liquidity management would be to raise the reverse repo rate from 3.35% to 3.50% in December 2021 and 3.75% in February 2022.