The Reserve Bank of India’s Monetary Policy Committee (MPC) increased the repo rate by 25 basis points to 6.5% on Wednesday, but surprised markets by leaving the door open to more increases in future, saying core inflation remained high.
The MPC maintained its hawkish stance of “withdrawal of accommodation”, dashing hopes for a definite signal for a pause in rate hikes. The apex bank did not give any forward guidance, which Reserve Bank of India governor Shaktikanta Das explained by saying that “it can become counter-productive”.
After Wednesday’s 4:2 majority decision in the MPC, interest rates have gone up by 250 basis points in the current cycle, which was kicked off by a 40 bps rate hike in an off-cycle meeting in May last year. As a result, the standing deposit facility (SDF) rate will be 6.25% and the marginal standing facility (MSF) rate and the bank rate have been raised to 6.75%.
“The rate hikes since May 2022 are still working their way through the system. On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospect,” said Das.
He said the inflation-adjusted, real interest rate remains below pre-pandemic levels and liquidity remains surplus, even though it is lower than during the pandemic.
The RBI has brought down the liquidity surplus in the banking system to below Rs 2 trillion from around Rs 9-10 trillion in the aftermath of pandemic-related support measures. A growing number of central banks around the world have signalled a pause or halt in their tightening in recent weeks as consumer inflation comes off the boil and growth in their economies shows signs of softening.
After the RBI slowed down the pace of interest rate hikes, benchmark equity indices Sensex and Nifty closed higher. Sensex gained 377.75 points and Nifty rose by 150.20 points. The 10-year bond yield closed 0.45% higher compared to its previous close of 7.311%, Bloomberg data showed.
“I think inflation is now in the rear view mirror, and the RBI is now ratcheting down the pace of hikes, very prudently. In two quarters or so, high inflation would be a distant memory,” said Shankar Sharma, director, G Quant.
While consumer price inflation has been pegged at 5.3% for FY24, the GDP growth rate for FY24 has been projected at 6.4%, with Q1 FY24 growth rate at a whopping 7.8%, which came as a surprise to many.
Abheek Barua, chief economist and executive vice president, HDFC Bank: “The RBI raised the repo rate by 25bps and kept its stance unchanged at ‘withdrawal of accommodation’ on expected lines. The policy tone was hawkish as the RBI recognised that they are still away from achieving their objective of durable disinflation.”
According to him, the RBI highlighted the elevated nature of core inflation and continuing global risks that could push up domestic inflation going forward. “On growth, the RBI pegged GDP growth at 6.4% in FY24, higher than consensus expectations — sounding optimistic on the growth momentum. Going forward, the central bank is likely to become more data dependent, and this does not rule out another rate hike in the upcoming policy,” added Barua.
Dinesh Khara, chairman, State Bank of India said the RBI’s decision to hike the rate was in consonance with the expectations “Continuing strong job data from Fed has made monetary policy making a delicate balancing act for emerging economies central banks. Beyond the rate hike, there are a bouquet of policies that attend the micro structure of the market,” he said.
Besides the hikes in repo rate, the RBI has also decided that all regulated entities will be required to have a policy on levy of penal interest on advances as these charges have been found to be excessive in some cases. The apex bank plans to bring out draft guidelines on levy of penal charges will be issued to obtain comments from stakeholders. “The proposal to address the issue of penal charges on services will bring a rule-based regulation,” added Khara.
Recognising the importance of climate-related financial risks, the RBI will issue a broad framework for acceptance of green deposits, disclosure framework on climate-related financial risks, and guidance on climate scenario analysis and stress testing.
To improve cash flows of medium and small-scale enterprises, the Trade Receivables Discounting System’s (TReDS) will be expanded providing insurance facility for invoice financing, permitting all entities/institutions undertaking factoring business to participate as financiers in TReDS and permitting re-discounting of invoices (that is, developing a secondary market in TReDS.
To cash in on the popularity of Unified Payments Systems in India (UPI), the central has proposed permitting all inbound travellers to India to use UPI for their merchant payments while they are in the country. To begin with, this facility will be extended to travellers from G-20 countries arriving at select international airports.
The RBI is also launching a pilot project on QR Code-based coin vending machines in 12 cities. These vending machines will dispense coins against debit to the customer’s account using UPI instead of physical tendering of banknotes. This will enhance the ease of accessibility to coins. Moreover, as part of its endeavour to further develop the government securities market, the apex bank has proposed to permit lending and borrowing of G-secs. “The proposal to permit lending and borrowing of government securities is a positive step that will provide market participants more flexibility and help deepen the bond markets,” said Ashu Khullar, CEO, Citi India and South Asia.