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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


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