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Informist, Wednesday, Oct. 9, 2024

MUMBAI – Following are edited excerpts of the top 10 announcements made by Reserve Bank of India Governor Shaktikanta Das on Wednesday after the Monetary Policy Committee meeting:

POLICY RATES

A majority of five out of six committee members decided to keep the policy repo rate unchanged at 6.50%. Consequently, the Standing Deposit Facility rate remains unchanged at 6.25% and the Marginal Standing Facility rate and Bank Rate remain unchanged at 6.75%.

MPC STANCE

The committee unanimously decided to change the stance to 'neutral' and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

GROWTH

High frequency indicators suggest that domestic economic activity continues to be steady. The main components from the supply side – agriculture, manufacturing and services – remain resilient. Agricultural growth has been supported by above normal southwest monsoon rainfall and better kharif sowing. Higher reservoir levels with good moisture conditions of soil augur well for the ensuing rabi crop. Manufacturing activity is gaining on the back of improving domestic demand, lower input costs and a supportive policy environment.

On the demand side, rural demand is trending upwards while urban demand continues to hold firm. Investment activity remains buoyant with government capital expenditure rebounding from a contraction observed in the Apr-Jun quarter. Private investment continues to gain steam on the back of expansion in non-food bank credit, higher capacity utilisation, and rising investment intentions. On the external front, service exports are supporting overall growth. 

Taking these factors into consideration, the real GDP growth forecast for 2024-25 (Apr-Mar) has remained unchanged at 7.2%. Projections have been revised for Jul-Sept at 7.0% from 7.2%, for Oct-Dec at 7.4% from 7.3%, and for Jan-Mar at 7.4% from 7.2%, with the risks evenly balanced. Real GDP growth for Apr-Jun of FY26 is projected at 7.3%.  

INFLATION

Headline inflation softened significantly in July and August with base effect playing a major role in July. Food inflation experienced a certain degree of correction during the two months. Deflation in fuel deepened on softening electricity and LPG prices. Core inflation, on the other hand, edged up in July and August. 

The CPI print for the month of September is expected to see a big jump due to unfavourable base effects and a pickup in food price momentum caused by the lingering effects of a shortfall in the production of onion, potato and chana dal (gram) in FY24, amongst other factors. The headline inflation trajectory, however, is projected to sequentially moderate in Jan-Mar due to good kharif harvest, ample buffer stocks of cereals and a likely good crop in the ensuing rabi season. Unexpected weather events and worsening of geopolitical conflicts constitute major upside risks to inflation. International crude oil prices have become volatile in October. The recent uptick in food and metal prices, as seen in the Food and Agricultural Organisation and the World Bank price indices for September, if sustained, can add to the upside risks.

Taking into account these factors, the CPI inflation projection was retained at 4.5% for FY25, with inflation in Jul-Sept at 4.1%, down from 4.4% earlier, and revised inflation for Oct-Dec at 4.8% against 4.7% earlier, and Jan-Mar at 4.2% against 4.3%, previously. CPI inflation projection for 2025-26 is projected at 4.3% with risks evenly balanced.

LIQUIDITY

System liquidity, as measured by the net position under the liquidity adjustment facility, remained in surplus of about INR 1.3 trillion during Aug-Sept and in early October, with a pickup in government spending and decline in currency in circulation. Liquidity conditions, however, had turned into deficit for a brief period during the latter half of September with the build-up of government cash balances on account of tax related outflows. In sync with the shifting liquidity conditions, the RBI proactively conducted two-way operations to ensure alignment of the inter-bank overnight rate with the policy repo rate.

Looking ahead, the RBI will continue to be nimble and flexible in its liquidity management operations, keeping in view the evolving liquidity conditions to ensure that money market interest rates evolve in an orderly manner.

FINANCIAL STABILITY

The health parameters of banks and non-banking financial companies continue to be strong. There has been some recent commentary on the likelihood of stress build-up in a few unsecured loan segments like loans for consumption purposes, micro finance loans and credit card outstandings. The RBI is closely monitoring the incoming information and will take measures as may be considered necessary. Banks and NBFCs need to carefully assess their individual exposures in these areas, both in terms of size and quality. Their underwriting standards and post-sanction monitoring have to be robust. Continued attention also needs to be given to potential risks from inoperative deposit accounts, cybersecurity landscape, and mule accounts.

The RBI has asked NBFCs, including micro-finance institutions and housing finance companies, to follow sustainable business goals with a 'compliance first' culture, a strong risk management framework along with a strict adherence to a fair practices code, and a sincere approach to customer grievances. The RBI is closely monitoring these areas and will not hesitate to take appropriate action, if necessary. Self-correction by the NBFCs would, however, be the desired option.

RESPONSIBLE LENDING CONDUCT

The RBI has taken several measures over the years to safeguard the interests of consumers. As part of these measures, banks and NBFCs are not permitted to levy foreclosure charges or pre-payment penalties on any floating rate term loan sanctioned to individual borrowers for purposes, other than business. The RBI has now proposed to broaden the scope of these guidelines to include loans to micro and small enterprises. The RBI will draft circular in this regard shall be issued for public consultation.

EXTERNAL SECTOR

India's current account deficit widened to 1.1% of GDP in Apr-Jun on account of a higher trade deficit. Buoyancy in service exports and strong remittance receipts are expected to keep the current account deficit within a sustainable level. On the external financing side, foreign portfolio investment flows have seen a turnaround from net outflows of $4.2 billion in Apr-May to net inflows of $19.2 billion during Jun-Oct (till Oct. 7).

Foreign direct investment flows will remain strong in FY25 as both gross and net FDI inflows improved in Apr-Jul. While external commercial borrowings moderated, non-resident deposits recorded higher net inflows compared to last year. India's foreign exchange reserves have already crossed a new milestone of $700 billion. Overall, India's external sector remains resilient as key external sector vulnerability indicators continue to improve.

UPI LIMIT ENHANCEMENT

In order to further encourage wider adoption of Unified Payments Interface and make it more inclusive, the RBI has proposed to increase the per-transaction limit in UPI123Pay to INR 10,000 from INR 5,000. The RBI also proposed to increase the UPI Lite wallet limit to INR 5,000 from INR 2,000 earlier, and per-transaction limit to INR 1,000 from INR 500.

CLIMATE RISK INFORMATION REPOSIORY

Climate change is emerging as a significant risk to the financial system world over. This makes it necessary for regulated entities to undertake robust climate risk assessment, which is sometimes hindered by gaps in high quality climate-related data. To bridge these data gaps, the RBI proposes to create a data repository, namely, the Reserve Bank – Climate Risk Information System (RB-CRIS).  End

Compiled by Vaishali Tyagi

Edited by Ashish Shirke

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