RBI Monetary Policy Highlights: Repo Rate Hiked; Inflation Seen At 6.7%, GDP Growth At 7% In FY23

The Reserve Bank of India's Monetary Policy Committee has raised its benchmark repo rate by 50 basis points to 5.9% to counter the sticky inflation in the Indian economy.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Key Highlights Of RBI Monetary Policy:

• Five out of six MPC members voted in favour of 50 bps rate hike.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, is adjusted to 5.65%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, is now at 6.15%.

The committee had first raised rates by 40 basis points at an unscheduled meeting in May, followed by 50 basis points in June and 50 basis points in August.

"Monetary and liquidity conditions remain accommodative," RBI Governor Shaktikanta Das said in his monetary policy speech on Friday, even as he announced merging the 28-day Variable Rate Reverse Repo, with the 14 day VRRR auctions.

"The monetary policy committee remains focused on withdrawal of accommodation to ensure that inflation remains within target while supporting growth," Das said.

Watch Das' full monetary policy speech here:

Trends in food prices and rumours on the government's fiscal decisions provide conviction that India's retail inflation, as measured by Consumer Price Index, in the second half of FY23 will be higher than the central bank's forecast.

India’s GDP growth rate has been estimated at 13.5% for the April-June 2022 quarter by the statistics ministry, compared to the RBI’s forecast of 16.2%. On the growth front, even as Q1 GDP, industrial production and exports data surprised negatively, the more salient high frequency data was resilient.

Liquidity levels have narrowed, and frictional factors have pushed banking liquidity closer to deficit recently. Lower surplus-liquidity levels are another factor supporting policy rate transmission, and perhaps also helping to ward off speculative pressure on the currency.

But with capital inflows picking up rapid pace in August and continuing in September, liquidity could get an unlikely buffer of rupee injection in lieu of dollar purchases/building up reserves.

India’s foreign exchange reserves declined to the lowest since October 2020. The reserves declined by $5.2 billion to $545.7 billion for the week ended Sept. 16, 2022, amid the central bank’s defense of the rupee.

Global commodity prices have remained volatile after their fall in June from historical highs, according to an SBI note. The course of commodity prices remain uncertain due to supply-demand imbalances, it said. As such, crude oil prices too continued to ease amid expectations of lower demand because of a slowdown.

The Reserve Bank of India will probably raise its repo rate by 50 basis points for a third straight meeting this week, according to DBS Bank Ltd. which revised its call from a 35-basis-point hike.

DBS is the latest to join the camp of those forecasting a bigger rate hike today, following a similar revision by Goldman Sachs. Citigroup has also firmed up its forecast for a half-point increase and expects the RBI to change its stance to “neutral”.

DBS revised its call amid stubbornly high inflation and a shift in the global policy environment “which has narrowed the room for gradual and incremental moves,” economist Radhika Rao wrote in a note. “The central bank’s hawkish policy bias will continue this week.”

India’s central bank has raised the benchmark rate by 140 basis points in three moves since May to 5.40% to tame inflation running past its target ceiling.

Sensex and Nifty opened little change ahead of RBI's repo rate decision today, as losses in energy, oil and gas, IT and realty stocks were offset by gains in FMCG, telecom and metal stocks.

The Indian rupee opened firm against the U.S. dollar ahead of RBI's repo rate decision. The currency opened at 81.59, 0.31% higher than Thursday's close of 81.84.

During opening trade, the local currency gained as much as 0.36% to 81.5.

RBI Governor Shaktikanta Das is scheduled to announce the monetary policy statement at 10:00 am today.

RBI Governor Shaktikanta Das has started his speech on the monetary policy, highlighting the global headwinds facing the Indian economy.

"The pandemic and conflict in Ukraine have create profound impact on global economy," Das says. Key highlights:

• Another storm of tough macroeconomic policy and more aggressive guidance by central banks is here.

• All segments of the financial markets are in turmoil across countries.

• Global economy is indeed in the eye of a new storm. Indian economy continues to be resilient.

Nervous investor sentiments have triggered a flight to safety, Das says.

The US dollar has reached a new high, he says. Emerging market economies are confronted with challenges of slowing global growth, elevated food and energy prices, spillovers from advanced economy policies, debt distress and sharp currency depreciation.

"Economic activity in India remains stable, (and) gives us the confidence of dealing with the current problems," Das says.

However, the recent correction in global commodities may ease cost pressures in coming months, the RBI Governor says.

• Inflation trajectory remains clouded in uncertainty

• MPC believes persistent high inflation required policy response

• This MPC action will support medium term growth prospects.

India's monetary policy had moved from neutral to accommodative stance in June 2019, says RBI Governor Shaktikanta Das.

• Inflation is hovering around 7% and we expect it to remain elevated around 6% in the second half of the financial year.

• Systemic liquidity remains in surplus. As government expenditure picks up, system liquidity will go up further.

• CPI inflation seen at 7.1% in Q2 FY23, 6.5% in Q3 FY23 and 5.8% in Q4 FY23, with risks evenly balanced.

• CPI inflation seen moderating to 5% in Q1 FY24

For 2022-23, India's inflation rate has been retained at 6.7%.

India's real GDP growth rate for FY23 is now projected at 7%, RBI Governor Shaktikanta Das says. The GDP growth is seen at 6.3% in Q2 FY23 and 4.6% in Q3 FY23 and 4.6% in Q4 FY23.

The Indian basket of crude oil prices stood at $104/barrel in the first half of FY23, Das says. The MPC is assuming brent crude at $100 per barrel in the second half of FY23, he says.

The Indian rupee is a freely floating currency whose exchange rate is market determined, RBI Governor Shaktikanta Das says.

• The RBI does not have any exchange rate in mind.

• The RBI intervenes to curb excessive volatility.

• Our actions have helped in anchoring investor confidence

"In the medium term, the primacy of price stability in our inflation targeting famework provides bedrock for exchange rate stability," Das says.

India's interventions in the forex market are based on assessment on prevailing market conditions, Das says. The country's reserves remain strong, he says.

"In a policy tightening, it is arduous to provide forward guidance in a continuous evolving climate," he says. "Our actions will be carefully calliberated with data and evolving conditions."

It has been decided that 28-day VRRR to be merged with 14-day VRRR auction, RBI Governor Shaktikanta Das says. Going forward, only 14-day VRRR auction will be conducted, he says.

India’s foreign exchange reserves stand at $537.5 billion, RBI Governor Shaktikanta Das says.

• About 67% of decline in India's forex reserves in FY23 is due to valuation changes resulting from dollar appreciation.

• There was accretion of $4.6 billion to the dollar reserves during the current financial year.

• Interventions in forex market are based on assessment on prevailing market conditions.

"The RBI has been judicious in its intervention in forex market," he says.

The Reserve Bank of India proposes to extend rules that apply online payment aggregators to offline payment aggregators as well, RBI Governor Shaktikanta Das says.

India's monetary policy committee, headed by RBI Governor Shaktikanta Das, has started addressing a press conference following the monetary policy statement.

The currency movement is not the factor driving monetary policy decisions, says RBI Governor Shaktikanta Das says. The MPC's decisions continues to be guided by domestic factors.

• There are two components in monetary policy framework: growth and inflation.

• MPC decisions are based on twin objectives, with primacy given to price stability.

For dealing with issues not relating to growth and inflation, the RBI has other tools, Das says.

India's net liquidity adjustment facility continues to be in surplus for last two years, except maybe for 2-3 days, RBI Governor Shaktikanta Das says.

• Many banks are dipping into excess CRR and SLR, because they need the cash.

• The second-half expenditures of state and central governments are very high.

• If you take everything into account, the system liquidity is in the order of Rs 5 lakh crore.

"There should not be any concern about liquidity suddenly being tight," Das says.

The actions taken by major central banks to combat inflation has indeed been a shock, RBI Governor Shaktikanta Das says. Nobody is blaming them, he says, but "we are dealing with the spillover of their actions".

• It has further accentuated the situation in the global markets.

• It has created excessive volatility in the currency market.

• Global currencies are depreciating, bond yields are very volatile.

• The third shock has added to the uncertainty that has been prevailing.

"The forward guidance of the U.S. Fed talks about future rate hikes, which are large," Das says. "The stress on global markets has increased by the actions taken by the global central banks."

In September itself, 40% of online transactions were undertaken using tokens, RBI Deputy Governor T Rabi Sankar says at the post-policy presser.

• Roughly 35 crore card tokens have already been created.

• The feedback is that the system is perfectly ready.

"We don't believe we should hold back steps to enhance customer safety due to a few laggards," Sankar says.

India's Monetary Policy Committee is yet to meet to discuss RBI's letter to the government on inflation consistently breaching the central bank's target, Das says.

"We are expecting inflation to come down close to the target over a two-year cycle. That was our expectation earlier and even now," Das says. "But there are so many uncertainties coming in from time to time."

The Reserve Bank of India doesn't have a rupee level in mind, RBI Governor Shaktikanta Das says. Earlier, he had said that the rupee is a freely floating currency whose exchange rate is market determined.

That, when the Indian rupee is testing 82/dollar levels.

"The issue is not the sojourn, but the journey," said RBI Deputy Governor Michael Patra when asked if the central bank is targetting 2019 interest-rate levels to move to a neutral policy stance. "And the journey has two milestones--when inflation gets into the tolerance band and when it aligns with the target. You’ll know then."