The Reserve Bank of India (RBI) announced its fourth bi-monthly monetary policy. The RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) meeting on October 4-6, 2023, decided to keep the rates and stance unchanged.
i.Policy Repo Rate: For the 4th time in a row, the MPC has opted to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%.
- The last adjustment to this rate was a 25-basis point increase to 6.50% during the February 2023 meeting.
- RBI Governor pointed out that the full transmission of 250 basis points repo rate reduction is still pending.
- The MPC’s main goal is to maintain the Consumer Price Index (CPI) inflation rate at a targeted level. The current target is set at 4%, with a tolerance range of +/- 2 percentage points.
RBI’s Policy Rates:
| Category | Rate |
|---|---|
| Policy Repo Rate (RR) | 6.50% |
| Standing Deposit Facility (SDF) Rate | 6.25% |
| Marginal Standing Facility (MSF) Rate | 6.75% |
| Bank Rate | 6.75% |
| Fixed Reverse Repo Rate (RRR) | 3.35% |
| Cash Reserve Ratio (CRR) | 4.5% |
| Statutory Liquidity Ratio | 18% |
ii.Real GDP Growth Projections: The MPC provided projections for real gross domestic product (GDP) growth for the fiscal year 2023-24:
- Overall, real GDP growth for 2023-24 is projected at 6.5%.
- For Q2FY24–6.5%.
- For Q3FY24–6.0%.
- For Q4FY24–5.7%.
- For Q1FY25–6.6%.
iii.The real GDP in the Q1FY24 (April-June) posted a growth rate of 7.8% year-on-year (y-o-y). This strong growth was attributed to factors such as private consumption and investment demand.
SDF, MSF, and Bank rate remain unchanged at 6.25% , 6.75%, 6.75%, respectively
The MPC also decided that Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates are also left unchanged at 6.25 per cent and 6.75 per cent, respectively. These rates are essential tools used by the RBI to regulate the flow of money in the banking system, ensuring stability and influencing borrowing and lending activities among banks.
- Special Drawing Facility (SDF): This rate signifies the interest rate at which banks can deposit their excess funds with the Reserve Bank of India (RBI). It remains steady at 6.25%.
- Marginal Standing Facility (MSF): MSF is a window for banks to borrow funds from the RBI in situations where inter-bank liquidity is exhausted. The interest rate for MSF remains unchanged at 6.75%.
- Bank Rate: The Bank Rate is the interest rate at which the RBI lends long-term funds to commercial banks. This rate is also set at 6.75%.
RBI maintains CPI inflation forecast for FY24 at 5.4%
RBI projects that Inflation is expected to average 5.4% in the fiscal year 2023–2024, which remained unchanged. Additionally, the target for economic growth remains at 6.5% for the same period.
- CPI stands for Consumer Price Index, is a way to measure how prices of everyday items change over time. It shows the average cost increase for things people buy regularly, like groceries and services.
Quarterly CPI Inflation Projections for FY23-24:
- Q2FY24: 6.4% (up from 6.2%).
- Q3FY24: 5.6% (revised down from 5.7%).
- Q4FY24: 5.2% .
- Q1FY25: 5.2% .
i.CPI headline inflation jumped by 2.6% points to 7.4% in July, primarily due to a spike in vegetable prices. It then moderated slightly in August to 6.8%.
ii.Fuel inflation – Increased to 4.3% in August.
iii.Core inflation, which excludes food and fuel
- Softened to 4.9% during July-August 2023.
- Core inflation has decreased by approximately 140 basis points from its highest point in January 2023.
RBI Doubles Gold Loan Limit Urban Cooperative Banks
During the sidelines of meeting, RBI announced to double the gold loan limit under Bullet Repayment scheme for Urban Cooperative Banks (UCBs). Monetary ceiling for gold loans under this scheme increased from ₹2.00 lakh to ₹4.00 lakh for UCBs that meet Priority Sector Lending (PSL) target and sub targets as on March 31, 2023.
- A bullet repayment scheme is when a borrower pays both the interest and the principal amount at the end of the loan tenure, without making any repayments during the loan duration period.
Background:
November 26, 2007: it has been decided to permit Bullet repayment of gold loans up to ₹1.00 lakh as an additional option.
October 30, 2014: Loan limit increased to ₹2.00 lakh.
October 6, 2023: Loan limit further increased to ₹4.00 laksh for UCBs meeting PSL targets.
ii.Loan Repayment Options
Bullet Repayment: Principal and interest paid in lump sum at the end of the loan tenure.
Equated Monthly Instalment (EMI) Repayment: Fixed monthly payments that include principal and interest.
Extension of PIDF Scheme to December 2025, Inclusion of Vishwakarma Beneficiaries
Reserve Bank Governor Shaktikanta Das announced the extension of the Payments Infrastructure Development Fund (PIDF) Scheme by 2 years, until December 31, 2025. This extended scheme will now include beneficiaries of the PM Vishwakarma Scheme, aiming to promote digital transactions at the grassroots level.
i.The PIDF Scheme was operationalized by the Reserve Bank in January 2021 for a 3-year period.
ii.Objective: Incentivize the deployment of payment acceptance infrastructure, including physical Point of Sale (PoS) and Quick Response (QR) codes.
iii.Target Areas: Tier-3 to tier-6 centers, northeastern states, and Union Territories of Jammu & Kashmir and Ladakh.
iv.Beneficiaries: Initially, focused on Tier-3 to Tier-6 centers and northeastern states.
v.In August 2021, beneficiaries of PM SVANidhi Scheme in Tier-1 and 2 centers were included in the PIDF scheme.
vi.By end-August 2023, over 2.66 crore new touchpoints have been deployed under the Scheme.
PM Vishwakarma Scheme:
- It was Launched by Prime Minister Narendra Modi in 2023,aims to support artisans and craftspeople who work with their hands and tools.
- This initiative offers collateral-free loans up to Rs 3 lakh in two installments: Rs. 1 lakh and Rs. 2 lakh. The loans come with a low interest rate of 5%, and the government provides an 8% subsidy.
- Covers artisans in 18 fields, including carpenters, goldsmiths, blacksmiths, masons, stone sculptors, barbers, and boatmakers.
RBI to introduce card-on-file tokenization at bank level
RBI proposes to introduce Card-on-File Tokenisation (CoFT) creation facilities directly at the issuer bank level.Currently, Card-on-File (CoF) tokens can only be created through a merchant’s application or webpage.
Objective: Proposal to introduce CoF token creation facilities directly at the issuer bank level and streamline token creation and linking for cardholders with various e-commerce applications.
RBI’s Card-on-File Tokenisation (CoFT) Initiative:
Introduced in September 2021 and implementation began on October 1, 2022.Over 56 crore tokens created, facilitating transactions exceeding ₹5 lakh crore.
What is Tokenisation?
CoFT or tokenisation is a process used to replace card details by a unique token or code. This ensures secure online transactions without revealing sensitive information such as the card number and card verification value (CVV).
RBI to consider OMO sales to manage liquidity
RBI may consider Open Market Operations (OMO) sales of government securities as a strategy to manage liquidity in the financial system.OMO sales will be conducted through auctions and not via Negotiated Dealing System-Order Matching (NDS-OM) platform.
i.To align liquidity with monetary policy, the Reserve Bank introduced a temporary Incremental Cash Reserve Ratio (I-CRR) at 10%,which amounted to about Rs 1.1 lakh crore,as a reserve.
- The I-CRR is gradually being phased out, with the final phase scheduled to conclude on October 7, 2023.
ii.High levels of MSF borrowings amid significant funds parked under the SDF indicate uneven liquidity distribution in the banking system.
- This led to a firming up of the weighted average call rate (WACR), the operating target of monetary policy, despite short-term rate hardening.
iii.Banks have chosen to place funds in the overnight SDF rather than participating in the main 14-day variable rate reverse repo (VRRR) operations.
- Banks are encouraged to assess their liquidity needs over the reserve maintenance cycle and actively participate in 14-day VRRR auctions.
RBI has allowed NBFCs (middle and base layer entities) to Offset Exposure with Credit Risk Transfer Instruments
The Reserve Bank of India (RBI) has granted permission to non-banking financial companies(NFBCs) categorized as middle layer and base-layer entities to use credit risk mitigation tools. This enables them to offset their exposure (protect themselves from financial risk) using eligible credit risk transfer instruments.
i.Existing guidelines allow offsetting exposures(practice of balancing or reducing financial risks) with credit risk transfer instruments for Non-Banking Financial Company (NBFCs) in the Upper Layer (UL).
ii.To harmonize norms, NBFCs in the Middle Layer (ML) and Base Layer (BL) will also be permitted to offset exposures using eligible credit risk transfer instruments.
Assessment of MPC:
Global Economy:
Global economic growth is slowing, prices remain high, government bond returns are rising, the US dollar is strengthening, and stock markets are declining. Emerging economies are experiencing currency depreciation and unpredictable capital flows.
Domestic Economy:
i.In September, southwest monsoon rainfall improved but remained 6% below the long-term average.
ii.Kharif crop cultivation area increased by 0.2% compared to the FY23.
iii.Industrial production rose by 5.7% in July 2023, and core industries expanded by 12.1% in August 2023.
iv.As of September 22, 2023, money supply (M3) expanded by 10.8% year-on-year (y-o-y), and bank credit grew by 15.3%.
v.As per RBI’s enterprise surveys, manufacturing firms expect higher input cost pressures but marginally lower growth in selling prices in Q3 compared to the previous quarter.
External Factors:-
i.Inward remittances – Increased by 5.8% year-on-year.
ii.The current account deficit (CAD) for Q1:2023-24 -Decreased to 1.1% of GDP compared to the FY23.
iii.Net foreign direct investment (FDI) moderated to USD 5.8 billion in April-July 2023 from USD 17.3 billion in the FY23.
iv.External commercial borrowings (ECBs):Net inflows of USD 4.5 billion during April-August 2023, compared to net outflows of USD 3.2 billion in the FY23. A significant portion of the ECBs was raised for capital expenditure.
The Monetary Policy Committee
Section 45ZB of the amended RBI Act, 1934, enables the Central Government to establish a 6-member Monetary Policy Committee (MPC) through an official notification in the Official Gazette.
The committee meets at least four times a year to decide on the monetary policy, specifically the repo rate. The repo rate is the rate at which the RBI lends money to commercial banks. By adjusting this rate, the RBI influences inflation and economic growth.
ii.The first MPC was formed in 2016.
iii.Present MPC members: Shaktikanta Das; Michael Debabrata Patra; Rajiv Ranjan; Prof. Ashima Goyal; Prof. Jayanth R. Varma; Dr. Shashanka Bhide
Note: Next meeting of the MPC is scheduled for December 6-8, 2023.
