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RBI’s Monetary Policy (October 06, 2023): In A Nutshell

The bi-monthly monetary policy of Reserve Bank of India (RBI) was announced on October 06, 2023. Here are some of the highlights of the monetary policy announcement.

Rates

 

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.

Global economy

  • The global economy is slowing under the impact of tight financial conditions, protracted geopolitical tensions and increasing geoeconomic fragmentation. 
  • Global trade is contracting. 
  • Headline inflation is easing but rules above the target in major economies. 
  • While major central banks are signalling a peaking of their rate hike cycle, there are indications that the tight monetary policy stance could persist for longer than anticipated earlier. 
  • Sovereign bond yields have firmed up, the US dollar has appreciated, and global equity markets have corrected.

Domestic Economy 

 

GDP growth projectionCPI inflation projection
FY 2023-246.5%5.4%
Q2 of FY 2023-246.5%6.4%
Q3 of FY 2023-246.0%5.6%
Q4 of FY 2023-245.7%5.2%
Q1 of FY 2024-256.6%5.2%
  • Growth –
    • Domestic economic activity exhibits resilience on the back of strong domestic demand.
    • Domestic demand conditions are likely to benefit from sustained buoyancy in services, consumer and business optimism, government’s continued thrust on capex, healthy balance sheets of banks and corporates, and supply chain normalisation. 
    • Real gross domestic product (GDP) posted a growth of 7.8% year-on-year (y-o-y) in Q1:2023-24.
  • Inflation –
    • The heightened inflation levels in July and August at 7.4% and 6.8% respectively, were largely driven by food price pressures.
    • Core inflation softened to 4.9% during July-August 2023.
    • Near-term inflation is expected to soften on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices.
    • Inflation target is 4% and not 2-6%. Aim is to align inflation to the target on a durable basis, while supporting growth.
  • Headwinds from geopolitical tensions and geoeconomic fragmentation, volatility in global financial markets, global economic slowdown, uneven monsoon, global food and energy prices, pose risks to the outlook.
  • Financial market –
    • The transmission of the 250 basis points (bps) increase in the policy repo rate to bank lending and deposit rates is still incomplete.
    • Excessive liquidity can pose risks to both price and financial stability. To ensure that liquidity conditions evolve in sync with the monetary policy stance, as a temporary measure, an incremental cash reserve ratio (I-CRR) of 10% was imposed, which impounded about ₹1.1 lakh crore from the banking system. The I-CRR was reviewed on September 08, 2023 and is being discontinued in a phased manner, ending October 07, 2023.
    • The Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth and robust earnings growth.
  • External Sector –
    • The current account deficit (CAD) for Q1:2023-24 declined to 1.1% of GDP.
    • India’s foreign exchange reserves stood at US$ 586.9 billion as on September 29, 2023.
    • External debt to GDP ratio was placed at 18.6% at end-June 2023 and reserves to external debt ratio was 94.6%. 
    • The reserve cover of imports is over 10 months.

Other measures

  • The extant prudential norms for projects under implementation have been reviewed and a comprehensive regulatory framework applicable for all regulated entities will be released for public comments. 
  • Under the Large Exposures Framework, Non-Banking Financial Companies (NBFCs) in the Upper Layer are permitted to use Credit Risk Mitigation (CRM) instruments for reducing their exposures to a counterparty. NBFCs in the Middle and Base Layers will also be permitted to use CRM instruments for reducing their counterparty exposure under the credit concentration norms.
  • To incentivize the Urban Co-operative Banks (UCBs) that have met the prescribed Priority Sector Lending (PSL) targets as on March 31, 2023, the existing limit for Gold Loans under the Bullet Repayment scheme has been increased from ₹2 lakh to ₹4 lakh. 
  • A draft omnibus framework for recognising Self-Regulatory Organisations (SROs) for various categories of Regulated Entities (REs) of RBI will be issued for stakeholder comments.
  • Payments Infrastructure Development Fund (PIDF) Scheme was operationalised RBI in January 2021 for a period of 3 years to incentivise the deployment of payment acceptance infrastructure such as physical Point of Sale (PoS), Quick Response (QR) codes in tier-3 to tier-6 centres, north eastern states and Union Territories of Jammu & Kashmir and Ladakh. Beneficiaries of PM SVANidhi Scheme in Tier-1 and 2 centres were later included in August 2021. 
    • As at end-August 2023, over 2.66 crore new touch points have been deployed under the Scheme. 
    • The scheme has been extended by 2 years, i.e., up to December 31, 2025. 
    • The coverage of PIDF scheme is also being expanded (i) to include the beneficiaries of PM Vishwakarma Scheme and (ii) to deploy emerging modes of payment acceptance, such as soundbox and Aadhaar-enabled biometric payment acceptance devices. 
  • At present, Card-on-File (CoF) token can only be created through merchant’s application or webpage. CoF token creation facilities will now be introduced directly at the issuer bank level. 
  • At present, the Internal Ombudsman (IO) framework in regulated entities comprises of separate guidelines for select Scheduled Commercial Banks (SCBs), Non-Bank issuers of Prepaid Payment Instruments (PPIs), NBFCs; and all Credit Information Companies (CICs). These guidelines have similar design features but vary in certain operational aspects. The IO guidelines will be consolidated and harmonised into a single master direction. 


References

Reserve Bank of India. (2023, October 06). 'Governor’s Statement: October 6, 2023'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56501

Reserve Bank of India. (2023, October 06). 'Statement on Developmental and Regulatory Policies'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56503


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