RBI Monetary Policy Highlights: From Currency Derivatives To Food Inflation And More

Transition over a period of time is going on, and we feel as mobilising of deposits at a high and higher rate, transition will continue, said Deputy Governor Michael Patra.

Challenges in the form of food inflation volatility, geo-political tensions and disruption in supply channels, said Siddarth Bhamre, Head of Institutional Research, Asit C Mehta Investment Interrmediates.

"Global factors are weighing high on governor's mind. In advanced economies, inflation remains sticky because of tight labour markets. Significantly higher Debt to GDP ratio may pose financial threat in adverse situations," he said.

Having the tag of Small Finance Bank is part of the differentiation, said Deputy Governor Rajeswar Rao. See no need to review the necessity of the 'small finance bank' tag, he said

RBI Governor Shaktikanta Das said that he can’t give forward guidance on future rate action, in response to a question from NDTV Profit's Vishwanath Nair.

Our monetary policy is primarily guided by domestic conditions, he said. We do not follow the footsteps of the U.S. Fed, he further added.

Primary objective is to align inflation with the target, said Deputy Governor Michael Patra.

Real rates matter, but the primary objective of monetary policy is inflation targeting, he said

Worried that there should not be a spillover of food inflation to CPI inflation, said Deputy Governor Michael Patra.

Food inflation has been highly volatile, reiterated Patra.

There are indications that food inflation could remain high, he said. In the case of food inflation, actors keep shifting, he further said, adding that this time it's proteins.

Received feedback and requests that more time is needed to conform with circular on exchange traded currency derivatives, said Governor Shaktikanta Das.

RBI deferred the circular to May 3 from April 5 on Thursday.

Rules state that exchange traded currency derivatives are only for hedging purposes, but some market participants have been misusing the facility, said Michael Patra.

Moot point is that underlying exposure is mandatory for exchange traded currency derivatives, he said.

Interpretation that relaxation in documentary evidence is tantamount to no underlying exposure is wrong, he clarified.

"RBI’s policy on forex risk management has remained consistent over last few years. There is no change in policy approach on forex risk management," said RBI Deputy Governor Michael Patra.

We typically issue statements after market hours, he said.

Wheat availability will not be affected too much but vegetable prices have to be watched, said Shaktikanta Das.

On upcoming climatic conditions, Das clarified that he has not said heatwaves, but rather higher temperatures.

Currency stability has always been a priority of the RBI, said Governor Shaktikanta Das.

• Have consciously built up forex reserves over last few years.

• Forex reserves act as a buffer against future risks.

Key Highlights of MPC’s April Review:

1. Inflation moderating, GDP growth is robust

2. MPC remains focused on aligning inflation to target on durable basis; derive satisfaction in progress made, but task not finished

3. Financial sector continues to be stable

4. External sector remains resilient

5. RBI to focus on preserving financial stability, promoting financial sector, payment system that is robust, resilient and future ready over next 10 years

The policy overall is on expected lines, said Das, adding that RBI, market participants, players, media and analysts are aligned on thinking on monetary policy

With inflation trends mixed, the MPC is preferring to wait for clearer signs of easing towards its 4% target, said Dharmakirti Joshi, chief economist at CRISIL.

"Easing food inflation and benign non-food inflation should bring headline inflation closer to the RBI’s target of 4%. That said, any weather disruptions and sustained uptick in crude oil prices will remain monitorable," said Joshi.

The transmission impact of rate hikes since May 2022 and regulatory measures on risky lending are still playing out, he noted.

As per the rating agency's base case, RBI is likely to be in a position to cut rates by mid-2024, Joshi said. Oil prices and poor monsoon may play spoilsport to this theory, he added.

The decision to maintain status quo for the seventh time in a row "suggests that when needed, the aim of financial stability may even precede inflation management," said Madhavi Arora, lead economist, Emkay Global Financial Services.

The fluidity of global narratives and policy repricing, along with the near-term problem-of-plenty on INR/bonds, could make it arduous for the RBI to find a balance in its policy biases, she said.

Considering this, RBI’s tone will slowly tiptoe to ‘Gracklish’ from the usual ‘Hawk-Dove’ signaling, implying a non-committal stance and limited definite forward guidance ahead, said Arora.

"While bull-steepening of India bonds looks to be a popular trade, consistent repricing of Fed cuts could spill over into the RBI’s reaction function and will be cyclically noisy for bonds/FX," she further added.

RBI Governor Shaktikanta Das will address a press conference after the monetary policy announcement in a short while from now.

Watch live and catch the latest update from the interaction here.

Keeping the repo rate unchanged will help sustain the momentum in real estate sector, said Anuj Puri, Chairman, Anarock Group.

"The decision to maintain status quo will keep the ongoing residential real estate sales momentum on course and unimpeded. Aspiring homebuyers eyeing a purchase will proceed with confidence," he said.

The RBI's decision to maintain status quo is a welcome development for the Indian housing market, said Samantak Das, chief economist and head – research and REIS, India, JLL.

The policy continuity fosters a predictable interest rate environment, which is crucial for both homebuyers and developers, he said. "We anticipate sustained demand, especially in the mid-tier and high-income segments."

The key focus of the policy is to be actively disinflationary, noted Lakshmi Iyer, CEO-Investment & Strategy, Kotak Alternate Asset Managers Limited said. "This is understandable given the 15% rise in crude oil prices since February 2024."

"It may be too pre mature for India to relent on rate cuts ahead of U.S. Fed for now. Growth projections are modest and seem achievable, headline inflation too... is broadly in line with our expectations," Iyer said.

Markets may need to wait longer for rate cuts, she said.

To permit use of third party UPI apps for making payments from PPI wallets, said Das

Distribution of retail CBDC to be allowed through non-bank payment system operators, he added.

RBI will allow small finance banks to use permissible rupee interest derivate products, said Shaktikanta Das.

It will also facilitate deposit of cash in cash deposit machines using UPI, he said.

RBI will introduce a mobile app for its retail direct portal, said Shaktikanta Das.

The central bank to take up comprehensive review of liquidity coverage ratio norms for banks, he said.

The central bank remains confident of meeting external requirements, said Shaktikanta Das.

It is RBI’s prime focus to build strong buffer in the form of substantial forex reserves.

Alert: RBI forex reserves are now at record high.

Net FPI inflows stood at $41.6 billion, compared with outflows in FY22, FY23, said the RBI Governor.

• Current Account Deficit narrowed significantly in first three quarters of FY24.

• India continues to remain the largest recipient of foreign remittances.

• India's FPI flows saw significant turnaround in FY24.

• Net FDI investments moderated in FY24.

RBI will continue to constructively engage with financial sector entities, said Shaktikanta Das

Financial stability is a joint responsibility of all stakeholders, he said

Indian rupee remained largely rangebound, and the most stable among major currencies, said Shaktikanta Das.

Compared to previous three years, rupee exhibited lowest volatility in FY24, Das said. Relative stability of rupee reflects sound macroeconomic fundamentals, external position, he added.

India’s liquidity situation improved in March, said Shaktikanta Das. Anticipating seasonal tightening, RBI injected liquidity at the end of March, he added.

• Average borrowings under MSF window moderated.

• Liquidity conditions eased again, necessitating VRRR auctions.

• Weighted average call rate displayed softening bias.

• Rates in collateralised segment also moderated.

• Monetary transmission in credit market is WIP.

Food inflation continues to exhibit volatility, impeding disinflation process, said Shaktikanta Das.

"Elephant (inflation) has now gone out for a walk, heading to the forest. We would like the elephant (inflation) to remain in the forest," he said.

• Ongoing effort is to execute fuller transmission of policy measures

• Will continue unwaveringly focussing on inflation

• In the past, elephant in the room was inflation.

CPI inflation in Q1 seen at 4.9%, Q2 at 3.8%, Q3 at 4.6%, and Q4 4.5%, said Shaktikanta Das.

• International food prices remain benign

• Output of key vegetables remain key monitorable owing to weather forecasts

• Climate shocks pose upside risk for domestic, international food prices

• Recent uptick in crude oil prices need to be monitored closely

• Continuing geopolitcal tensions also pose upside risk to crude prices

Real GDP growth for FY25 is projected at 7%, with Q1 at 7.1%, Q2 at 6.9%, and 7% in Q3 and Q4, said Shaktikanta Das.

Prospects of investment activity remain bright because of persisting and robust govt capital expenditure, Healthy balance sheets of banks and corporates, increasing capacity utilisation, strengthening business optimism, he said.

Risks to GDP projections are evenly balanced, Das said, adding that early indication of normal monsoon bodes well for kharif season.

Above normal temperatures expected to prevail in April-June

Frequent climate shocks provide upside risks to domestic, international food prices.

Total flow of resources to commercial sector seen at Rs 31.2 lakh crore in FY24, with is significantly higher than previous years, says Shaktikanta Das.

• Agri and rural output appears bright

• External demand improved in Feb, with exports growing in double digits

• Outlook for agriculture, rural activity appears bright

• Trade deficit has widened

• Prospects of investment activity remain bright

With rural demand catching up, consumption is expected to improve in 2024-25, says Shaktikanta Das.

• Industrial activity led by manufacturing continued its momentum

• PMI for manufacturing displayed sustained expansion in February, March.

• Services exhibited broad-based buoyancy with all sectors registering strong growth.

• Services PMI remained above 60 in Feb and March

High public debt is a dormant risk which could erupt, warns RBI Governor Das

• Equity markets have gained while bond yields and US dollar remain volatile

• Worsening debt in advanced economies can create spill-overs for emerging market economies

• EMEs with rising public debt are vulnerable to spill-over effect

Global economy has remained resilient, says the RBI Governor, adding that global trade is expected to grow fast in 2024.

• Services inflation remains sticky in advanced economies.

• Equity markets have gained while bond yields, dollar remained volatile.

• Inflation moving closer to targets, but last mile turning out to be challenging.

• Debt to GDP ratio remained elevated, projected to rise further.

• Debt sustainability concerns rising globally.

Monetary policy must continue to be deflationary, says Shaktikanta Das,

MPC will remain resolute in its commitment to aligning inflation with target, he says.

Core inflation declined steadily over the last nine months, says RBI Governor Shaktikanta Das.

Fuel component of CPI remained in deflation for six months, Das says, adding that robust growth prospects provide policy space to remain focused on inflation.

Five of six MPC members voted to keep policy repo rate unchanged at 6.5%. The panel maintained policy stance as "withdrawal of accommodation" with majority of 5:1.

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RBI well-positioned to take holistic view of issue facing economy, says Governor Shaktikanta Das.

• Journey of RBI closely related to evolution of Indian economy

• RBI discharged responsibility with integrity, professionalism

• RBI was always at the forefront in steering the Indian financial system toward stability

• RBI has a much broader range of functions, compared to many other central banks

Governor Shaktikanta Das to begin his monetary policy statement shortly. Watch the announcement live here.

World Bank recently estimated India's GDP growth rate for fiscal 2024 at 7.4%.

India economy surprised with a growth rate of 8.4% in the December quarter.

The RBI officials might address concerns over the new norms on exchange-traded currency derivatives today. Traders have been in a tizzy over the new circular which stated that such transactions must have an underlying foreign exchange exposure.

Liquidity conditions have eased in the past few weeks, Bajoria said, adding that the ongoing balance of payment surpluses and pre-election spending likely to keep liquidity conditions in check.

India's retail inflation in February remained mostly unchanged from a month ago. The Consumer Price Index-based inflation stood at 5.09% in February, as compared with 5.1% in January.

The food price inflation increased to 8.7% in February, while core inflation—excluding food and fuel—eased to 3.4%. That was the lowest since, at least, 2018.

India's Monetary Policy Committee is convening for the first time this fiscal year from April 3 to 5 and is expected to maintain status quo at its seventh straight meeting. Since the committee's last meeting in February, there have been minimal changes, with inflation continuing to indicate easing while economic growth remains robust.

All economists polled by Bloomberg expect the MPC to keep the repo rate unchanged at 6.5%.

Liquidity conditions have eased in the past few weeks, with ongoing balance of payment surpluses and pre-election spending likely to keep liquidity conditions in check, according to Barclays' Chief Economist Rahul Bajoria.