RBI Monetary Policy – Dec 23

Fifth Pause in a Row.
• The Monetary Policy Committee has voted unanimously to keep the policy repo rate unchanged at 6.5%, its fifth pause on the trot and in line with economists’ estimates polled by Bloomberg. All members voted in favour of remaining focussed on withdrawal of accommodation stance, while five out of six members voted in favour of continuing stance.

Headline Inflation above Peers:
• While headline inflation receded from last year, it remains above target in many countries, RBI Governor Shaktikanta Das said.
• Core inflation continues to remain sticky, while financial markets remain volatile in their quest for definitive signals, he said.
• Indian economy presents picture of resilience and momentum, Das said, emphasising that Q2 GDP exceeded all forecasts and fiscal consolidation is on course.
• External balance remaining eminently manageable, the central banker said, adding that it is the RBI’s endeavour to further build on these fundamentals.

CPI Components Moderated:
• While moderation was observed in all components of CPI, said Governor Das, risks to food inflation may lead to uptick in November and December.
• Domestic economic activity is resilient and holding up well, he said.
• The MPC remains highly alert, prepared to undertake policy action as required, Das said, adding that previous rate action is still working its way through the economy.

Indian Economy Buoyant in Q2:
• Economic activity in India showed buoyancy in the second quarter, the RBI Governor said.
• Two third of rabi sowing has been completed in Q3
• Manufacturing gained strength with easing input cost pressures
• 8 core sectors recorded robust growth
• PMI for manufacturing rose in November
• GST collections at Rs 1.68 lakh crore in November were buoyant

GDP Growth Forecast:
• The Reserve Bank of India expects the Indian economy to clock a real GDP growth of 7% in FY24. Asia’s third largest economy is estimated to grow at 6.5% in October-December this year, 6% in January-March 2024 and 6.7% in April-June 2024. GDP growth to be 6.5% in Q2 FY25 and 6.4% in Q3 FY25.
• In the last MPC meeting, the panel had estimated the economy to record real GDP growth of 7% in FY24, with 6.5% growth in October-December 2023, 6% in January-March 2024 and 6.7% in Q1 FY25, 6.5% in Q2 FY25 and 6.4% in Q3 FY25.
• The risks are evenly balanced.

Inflation Forecast:
• CPI inflation seen at 5.4% in FY24
• CPI inflation seen at 5.6% in Q3, 5.2% in Q4
• CPI inflation seen at 5.2% in Q1 FY25, 4% in Q2 FY25 and 4.7% in Q3 FY25

Household Consumption:
• Household consumption supported by durable urban demand
• Household consumption also supported by gradual turnaround in rural demand
• Festival demand spurring household discretionary consumption in Q3
• Investments in fixed assets by private companies showed healthy growth
• Total flow of resources to commercial sector at Rs 17.6 lakh cr in FY24
• Flow of resources to commercial sector significantly higher this year
• Exports returned to positive territory in October despite weakness in external demand
• Private consumption should gain support from gradual recovery in rural demand
• Healthy twin balance sheets of banks, corporates should propel private capex
• Drag from external demand expected to moderate
• Protracted geopolitical turmoil, volatility in financial markets pose risks to outlook

CPI Target of 4% yet to be achieved, Food Inflation to be Monitored Closely:
• Have made significant progress in bringing down inflation
• Growth remains resilient and robust
• Notwithstanding this progress, the target of 4% CPI is yet to be reached
• Trajectory of food inflation needs to be monitored carefully
• Monetary policy has to stay alert to risks to inflation becoming generalised
• Monetary policy has to remain actively disinflationary

Deficit Conditions Led to Banks Tapping MSF:
• Size of RBI balance sheet swelled to 28.6% of GDP in FY21
• It moderated to 23.3% in FY23 and further to 21.6% this year, up to Dec. 1
• System liquidity turned to deficit mode in September after four years
• System liquidity tightened more significantly than what was envisaged in last policy
• Reason to introduce open market operations has not arisen so far
• Going further, govt spending will likely ease liquidity conditions
• RBI will remain nimble in liquidity management

SDF, MSF Liquidity Reversal to be available on Weekends, Holidays:
• Liquidity facility reversal change to come into effect on Dec 30
• Measure on liquidity will facilitate better fund management by banks
• To review liquidity facility reversal after six months or earlier if needed

Recommends ‘Prudence At All Times:
• “Do not wait for house to catch fire and then act,” Das said on recent preventive measures taken to address potential risks. “Prudence at all times should be the guiding philosophy both for regulators, regulated entities.”

New Regulatory Frameworks in Pipeline:
• RBI will announce regulatory framework on connected lending. The central bank will also lay down regulatory framework for web aggregation of loan products.
• The UPI limit for hospitals and educational institutions will be raised to Rs 5 lakh from Rs 1 lakh.

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