The Reserve Bank of India (RBI) Governor Shaktikanta Das revealed the third bi-monthly monetary policy for FY24. The six-member Monetary Policy Committee (MPC) of the RBI met for three days from August 8 to August 10. Today, the RBI maintained the repo rate at 6.5%. The central bank has increased the repo rate by 250 basis points (bps) since May 2022.
For short-term loans up to Rs 3 lakh made through Kisan Credit Cards (KCC), the RBI recently announced that the interest rate will be 7 percent and the interest subsidy will be 1.5 per cent for the current fiscal year (FY23) and the following fiscal year (FY24). Farmers who will return the loan on time will also receive an additional interest subsidy of 3% annually, up to a maximum of a year from the date of distribution.
According to the RBI, in order to further financial inclusion, a platform for hassle-free credit delivery through digital means, similar to the Kisan Credit Card (KCC), will be made available for other loans.
The information needed for credit assessment is available from a variety of sources, including the federal and state governments, account aggregators, banks, credit information firms, digital identification authorities, etc., for digital credit delivery.
With effect from August 12, banks have to maintain an incremental Cash Reserve Ratio (CRR) of 10 per cent on an increase in their NDTL between May 19 and July 28, Das said.”This measure is intended to absorb the excess liquidity generated due to withdrawal of Rs 2000 banknotes, etc.”, he said, adding that this a temporary measure only.
“We have reviewed the position and on the basis of our assessment, there will be adequate liquidity to meet the credit needs of the economy,” he said.
According to Governor Das, it is important to build up buffers during prosperous times, and the RBI is unwavering in its resolve to protect the system from present and future threats.
According to him, India’s CAD was kept under control at 2 per cent of GDP in FY23 and is anticipated to stay extremely controllable this fiscal year.
Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank, said on RBI Monetary Policy, “The RBI kept its policy rate unchanged as expected at 6.5% but its message was clearly hawkish. This was reflected in the upward revision in Q2 FY24 inflation forecast by 100bps to 6.2% and the decision to tighten liquidity through the incremental CRR for banks. The latter could reduce system liquidity balance by INR 60-70K crores. While the ICRR decision is to be reviewed in September and could be a temporary decision, if inflation pressures linger on, the possibility of continued durable liquidity tightening is likely.”
“The RBI reiterated its resolve to bring inflation back to 4% on a sustainable basis and highlighted risks beyond the transitory vegetable price pressures. We expect inflation to average at 5.6% in FY24 with inflation expected to print above 6% till September,” he added
Deepak Agrawal, CIO- Fixed Income, Kotak Mahindra Asset Management Company, said “RBI prefers to be in “wait and watch” mode to check if the recent food price inflation is getting generalized and prefers to keep rates on hold and keep the monetary policy unchanged. FY 24 inflation has been revised upward from 5.10% to 5.4%. Proactive government measures to curb food inflation should assist in keeping inflation lower. RBI likely to stay on hold for rest of CY 2023. In order to address the Surplus Liquidity situation, RBI has asked banks to maintain incremental CRR of 10% on Deposit growth between 19th May and 28th July 2023, which will reduce liquidity in the system by ~ 90000 crs.”
Radhavi Deshpande, President & Chief Investment Officer, Kotak Mahindra Life Insurance Company, said “After rightly guiding the markets in the previous policy, MPC keeps rates on hold for the third time in row. MPC continues to highlight Global economy challenges including high levels of debt while it takes comfort from the domestic stable core inflation and normalising supply pressures to keep monetary policy framework unchanged.”
“MPC‘s inflation target rate at 4% keeps getting a mention, with introduction of innovative instruments to keep liquidity around adequate levels will keep markets watchful on further moves. A mention of high current food inflation as transitory and considering a balanced demand-supply for bonds, comfortable fiscal and stable current account, we continue to expect a longish pause as our base case and bonds to stay range bound with yield curve steepening bias to stay” he added.
Akash Sinha, CEO & Co-Founder, Cashfree Payments, said that, “The Reserve Bank of India (RBI) has once again emphasised the significance of promoting digital payments in its latest Monetary Policy announcement. By proposing innovative concepts such as Conversational Payments and Offline capability on the Unified Payments Interface (UPI), the Central Bank is wholeheartedly advocating the integration of cutting-edge technologies like Artificial Intelligence (AI) and Near Field Communication (NFC) through ‘UPI-Lite’ on-device wallet, within the realm of payments.
“In a broader context, the Central Bank’s concerted efforts to enhance the adoption and effectiveness of digital payments are fostering a robust and competitive environment for all stakeholders involved. Moreover, the ingenuity and progress achieved in India’s digital payments landscape are poised to strengthen our global standing, particularly concerning UPI and digital payments. This collective advancement is set to elevate India’s stature on the global stage, underscoring our nation’s prowess and leadership in the realm of innovative payment solutions”, he added further.
Dhiraj Relli, MD & CEO, HDFC Securities stated that, “There was unanimity in the market about no changes in the rates at the RBI MPC meet on Aug 10 and the markets did not get surprised at the outcome. The MPC continued with the ‘withdrawal of accommodation’ stance (with 5:1 majority). Hawkish pause was widely expected with inflation assuming the center stage given the recent uptick in food prices, as seen from sharp increase in RBI’s inflation forecast. from 5.1% to 5.4% for FY24. India’s economic activity has continued to demonstrate resilience and RBI retained its GDP forecast at 6.5% in FY24.
Given the excess liquidity in the system, especially from withdrawal of Rs 2000 notes; RBI directed scheduled banks to maintain an incremental CRR of 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023 to absorb the surplus liquidity. Post this announcement, Bank Nifty slipped into weakness as this announcement is negative for Banks. Higher forecast of inflation also doused hopes of an early beginning of rate cut impacting Bank stocks.
RBI is expected to maintain close vigil on the evolving inflation outlook and is focused to keep inflation expectations firmly anchored at its primary target of 4%, though the task seems daunting. We think the central bank seems to have fewer concerns about growth rather than uncertainty around the inflation outlook. We expect rate cut perhaps in Q1FY25 but that would be data dependent.
Banks may not help Nifty to continue to rise and focus could shift to other sectors in the near term.”
Virat Diwanji, Group President and Head – Consumer Bank, Kotak Mahindra Bank, said, “The RBI’s decision to keep the repo rates on hold, but with a “ready to act” message was widely expected since the inflation, driven by vegetable prices, has been on a spiral since June. While the food prices are expected to temper from September onwards, the core inflation remains sticky. RBI’s inflation outlook for a period up to Q1 FY25 has been revised upwards, thus indicating a rate cut is further away in the horizon. Even our domestic economic outlook is robust, the global factors – especially the El Niño factor in September-October period may influence the next year’s crop outlook.”
He further added, “The move to cut the temporary liquidity overhang from the return of ₹2000 banknotes through an Incremental CRR of 10% will help the price stability. These funds are expected to return to the system ahead of the festival season, boosting the domestic consumption. The central bank has rightly decided to wait for the monetary transmission data from the earlier hikes to take further actions.”
Abhay Bhutada- Managing Director Poonawalla Fincorp, said, “We acknowledge the MPC’s decision to maintain the ‘status quo’ on repo rate. As we enter the festive season, the unchanged repo rate will play a role in enhancing credit demand for both personal and business loans, and aid in sustaining credit momentum for additional business growth.
I welcome RBI’s decision to establish a framework for bringing more transparency for reset of interest rates on floating interest loans, which will further reinforce consumer protection.”
Shanti Ekambaram, Whole-Time Director, Kotak Mahindra Bank Ltd, said that, “In an unanimous decision the MPC kept the repo rates unchanged at 6.5% amid worries about global headwinds and domestic inflationary pressures arising out of elevated food prices. All high frequency data indicates resiliency in economic growth across segments resulting in MPC retaining the estimated growth of 6.5%. However given the sharp hike in vegetable and cereals prices inflation trajectory for the year has been revised to 5.4% for the year as against 5.1% earlier. The central bank reiterated its inflation target of 4% and stayed committed to providing adequate liquidity to support growth . For now expect pause for some time unless data shows a different trend. Also global factors – rising crude and Fed’s stance could have a bearing on future rate action. The surplus liquidity in the system on account of government spending, return of ₹2000 banknotes to the banking system, strong capital flows resulted in temporary increase of CRR of 10% . Overall a balanced policy.”
Sujata Guhathakurta, President –Debt Capital Markets & Infrastructure Financing, Kotak Mahindra Bank, said that, “While it was a balanced policy and a less hawkish stance taken by the MPC, there may be some impact on short term rates due to temporary increase in CRR requirement. RBI wants to look through transitory spikes in inflation prints due to rise in vegetable prices as long as they are not persistent, seems to be indicating rate hike is not imminent in near future. Good development for increasing eligible list of assets for Infrastructure Debt Funds (IDFs) by including toll-operate-transfer (TOT) assets & making tri-partite optional in public-private partnership (PPP) projects.”