Skip to main content

RBI’s Monetary Policy (August 10, 2023): In A Nutshell

The bi-monthly monetary policy of Reserve Bank of India (RBI) has been announced on August 10, 2023. Here are some of the highlights of the monetary policy announcement.

Rates and reserves

 

ChangeRate
Policy repo rateUnchanged6.50%
Standing deposit facility (SDF) rate6.25%
Marginal standing facility (MSF) rate6.75%
Bank rate6.75%

Monetary policy stance

  • Withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Economy 

 

 GDP growth projection CPI inflation projection
FY 2023-24 6.5% 5.4%
Q1 of FY 2023-24 8.0% 4.6%
Q2 of FY 2023-24 6.5% 6.2%
Q3 of FY 2023-24 6.0% 5.7%
Q4 of FY 2023-24 5.7% 5.2%
Q1 of FY 2024-25 6.6% 5.2%
  • Indian economy is exuding enhanced strength and stability. India’s strong macroeconomic fundamentals have laid the foundations for sustainable growth.
  • Indian economy has become the fifth largest economy in the world (in terms of GDP at market exchange rate), contributing around 15% to global growth. 
  • The global economy continues to face daunting challenges of elevated inflation, high levels of debt, tight and volatile financial conditions, continuing geopolitical tensions, fragmentations and extreme weather conditions. India is, however, expected to withstand the external headwinds far better than many other countries.
  • Headline inflation projection for Q2 of 2023-24 has been revised up substantially, primarily due to the price shock from vegetables.
  • RBI Governor reiterated that “bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4%”.
  • Indian financial sector has been stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets and adequate capital and liquidity buffers.
  • Corporate balance sheets are robust, with lower leverage, improving debt servicing capacity and strong profitability. 
  • India’s current account deficit (CAD) was contained at 2.0% of GDP in 2022-23 as compared with 1.2% in 2021-22. Merchandise trade deficit has narrowed in Q1 of 2023-24 with contraction in imports exceeding contraction in exports. Services exports and remittances are, however, expected to provide cushion to the current account deficit. RBI, therefore, expects CAD to remain eminently manageable during the current financial year also.
  • Latest available data suggest that India’s external debt to GDP ratio improved to 18.9% at end-March 2023 from 20% at end-March 2022.
  • Indian rupee has remained stable since January 2023. 
  • Foreign exchange reserves have crossed US$ 600 billion mark.
  • The level of surplus liquidity in the system has gone up in the recent months on the back of return of ₹2000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows.
  • In recent years, RBI’s stated stance on liquidity is to maintain adequate liquidity in the system to meet the productive requirements of the economy. Excessive liquidity, on the other hand, can pose risks to price stability and also to financial stability. 
  • With effect from the fortnight beginning August 12, 2023, scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023. This measure is intended to absorb the surplus liquidity generated by various factors including the return of ₹2000 notes to the banking system. This is purely a temporary measure for managing the liquidity overhang. Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy. The I-CRR will be reviewed on September 8, 2023 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season. 
  • The existing cash reserve ratio (CRR) remains unchanged at 4.5%.

Other measures

  • The extant regulations issued in June 2019 will be revised and a comprehensive, risk-based framework will be put in place for administration of financial benchmarks. This will cover all benchmarks related to foreign exchange, interest rates, money markets and government securities. 
  • At present, Infrastructure Debt Funds (IDFs) provide refinancing facilities for lenders in the infrastructure sector. The extant regulatory framework for IDFs has been revised. The key changes in the revised framework are –
    • Withdrawal of the requirement to have a sponsor for the IDFs
    • Allowing IDFs to finance toll-operate-transfer (ToT) projects as direct lenders
    • Permitting IDFs to raise funds through ECBs
    • Making tri-partite agreements optional for PPP projects
  • A transparent framework will be put in place for reset of interest rates on floating interest loans. The framework will require Regulated Entities to –
    • Clearly communicate with borrowers for resetting the tenor and / or EMI
    • Provide options for switching to fixed rate loans or foreclosure of loans
    • Disclose various charges incidental to the exercise of the options
    • Ensure proper communication of key information to borrowers 
  • The guidelines on submission of supervisory returns by supervised entities will be consolidated and harmonised into a single Master Direction. 
  • “Conversational Payments” will be introduced on UPI, which will enable users to engage in conversation with AI-powered systems to make payments. This channel will be made available in both smartphones and feature phones-based UPI channels. The facility will, initially, be available in Hindi and English and will subsequently be made available in more Indian languages. 
  • Offline payments will be introduced on UPI using Near Field Communication (NFC) technology through ‘UPI-Lite’ on-device wallet
  • The transaction limit for small value digital payments in off-line mode without two-factor authentication will be enhanced from ₹200 to ₹500 within the overall limit of ₹2000 per payment instrument.
  • RBI, in association with the Reserve Bank Innovation Hub (RBIH), started a pilot project in September 2022 for frictionless credit delivery through end-to-end digital processes, starting with Kisan Credit Card (KCC) loans of less than ₹1.60 lakh. The pilot for KCC loans is currently operational in select districts of Madhya Pradesh, Tamil Nadu, Karnataka, UP and Maharashtra. Recently, dairy loans have been included in the pilot project in select districts of Gujarat. Based on the learnings from the pilots and to expand the scope of end-to-end digital lending processes, a Public Tech Platform for Frictionless Credit delivery is being developed by the RBIH. The Platform is intended to be rolled out as a pilot project in a calibrated manner. It will have an open architecture and open Application Programming Interface (API) and Standards, to which all financial sector players can connect seamlessly in a ‘plug and play’ model. 


References

Reserve Bank of India. (2023, August 10). 'Governor’s Statement: August 10, 2023'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56175

Reserve Bank of India. (2023, August 10). 'Statement on Developmental and Regulatory Policies'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56174


Follow at - Telegram   Instagram   LinkedIn   Twitter   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Credit Cards and Debit Cards

Reserve Bank of India (RBI) has issued directions on issuance of credit cards and debit cards. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Non-Banking Financial Companies (NBFCs) for all layers – NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro Finance Institutions (NBFC-MFI)  Housing Finance Company (HFC)  What is a credit card? Credit Card is a physical / virtual payment instrument issued with a pre-approved revolving credit limit that can be used to purchase goods and services or draw cash advances. What is a debit card? Debit Card is a physical / virtual payment instrument linked to a Savings Bank / Current Account which can be used to withdraw cash, make online payments, do Point of Sale (PoS) terminal / Quick Response (QR) code transactions, fund transfer, e...
Post a Comment
Read more

Deposits between a person resident in India and a person resident outside India

Reserve Bank of India (RBI) has updated the regulations on deposits between a person resident in India and a person resident outside India. What are the restrictions on deposits between a person resident in India and a person resident outside India? No person resident in India shall accept any deposit from, or make any deposit with, a person resident outside India. However, the following deposits are exempted – Deposits held in rupee accounts maintained by foreign diplomatic missions and diplomatic personnel and their family members in India with an authorised dealer. Deposits held by diplomatic missions and diplomatic personnel in special rupee accounts namely Diplomatic Bond Stores Account to facilitate purchases of bonded stocks from firms and companies who have been granted special facilities by customs authorities for import of stores into bond. The funds in the account may be repatriated outside India without the approval of the RBI. Deposits held in accounts maintained in foreig...
Post a Comment
Read more

Credit Derivatives

Reserve Bank of India (RBI) has issued directions on credit derivatives. What is Credit Derivative? Credit derivative means a derivative contract whose value is derived from the credit risk of an underlying debt instrument or an index of underlying debt instruments. What is Credit Default Swap (CDS) and Total Return Swap (TRS)? Credit Default Swap (CDS) means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Total Return Swap (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-d...
Post a Comment
Read more

Payment of Agency Commission to Agency Banks (ABs) and Disbursement of Government Pension by ABs

Reserve Bank of India (RBI) has issued guidelines on the conduct of Government business by Agency Banks (ABs), payment of agency commission to ABs and disbursement of Government pension by ABs. Who are ABs? ABs mean all Public Sector Banks (PSBs), scheduled Private Sector Banks (PVBs), scheduled Payments Banks (PBs), and scheduled Small Finance Banks (SFBs) appointed by the RBI under Section 45 of the RBI Act, 1934, by mutual agreement, to carry out Government banking business of the Central Government (CG) / State Governments (SGs). What is agency commission? Agency commission means the remuneration paid by the RBI to an AB in consideration of it acting as an agent of the RBI in the conduct of general banking business of the CG and the SGs at the places and in the manner specified in the agreement between the RBI and the bank, with the exception of the functions relating to the management of the public debt. What are the guidelines on appointment of ABs? Any eligible bank which intend...
Post a Comment
Read more

Special Rupee Vostro Accounts (SRVAs)

Reserve Bank of India (RBI) has consolidated the guidelines governing Special Rupee Vostro Accounts (SRVAs). Who can open and maintain Special Rupee Vostro Accounts (SRVAs)? Authorised Dealer (AD) banks in India may open Special Rupee Vostro Accounts (SRVAs) of its branch outside India or a bank resident outside India. Which transactions can be settled through SRVA? The settlement of cross-border trade transactions through SRVA is an additional arrangement for invoicing, payment and settlement of exports and imports in Indian Rupee (INR).  All permissible capital and current account transactions under Foreign Exchange Management Act (FEMA) may be settled through the SRVA.  AD banks maintaining SRVA are permitted to open additional current account for exporter / importer, exclusively for settlement of export / import transactions. What can be the source and use of funds in SRVA? SRVA may be funded by way of inward remittances or transfer from other repatriable INR accounts in t...
Post a Comment
Read more