In its August meeting, the RBI Monetary Policy Committee kept the repo rates unchanged at 6.5%. This is the ninth consecutive meeting where the RBI decided to keep rates unchanged. You can find the link to the full report here.
Highlights
Policy stance
- 4 of the 6 MPC members voted to keep the repo rate unchanged and remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.
*An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth. Withdrawal of accommodation will mean reducing the money supply in the system which will help control inflation.
Global growth
The global economic landscape is showing consistent yet varied growth. There appears to be a deceleration in manufacturing, while the service sector remains robust. Inflation, despite persistently high service prices, is slowly diminishing across major economies.
- Although the near-future economic outlook appears positive, substantial challenges are looming over the mid-term global growth. Factors such as demographic changes, climate change, geopolitical instability, financial fragmentation, increasing public debt, and the emergence of new technologies – notably artificial intelligence, represent new hurdles to overcome.
Domestic Growth
Domestic economic activity continues to be resilient. On the supply side, steady progress in the southwest monsoon, higher cumulative kharif sowing, and improving reservoir levels augur well for the Kharif output. On the demand side, household consumption is supported by a turnaround in rural demand and steady discretionary spending in urban areas. Fixed investment activity remained buoyant, amid the government’s continued thrust on capex and other policy support. Private corporate investment is gaining steam on the back of expansion in bank credit.
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Looking ahead, improved agricultural activity brightens the prospects of rural consumption, while sustained buoyancy in services activity would support urban consumption. The healthy balance sheets of banks and corporates; thrust on capex by the government; and visible signs of pick up in private investment would drive fixed investment activity. Improving prospects of global trade are expected to aid external demand. The spillovers from protracted geopolitical tensions, volatility in international financial markets, and geoeconomic fragmentation, however, pose risks on the downside.
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There is a moderation in the growth projection for Q1 of the current year in relation to the June 2024 projection due to updated information on certain high-frequency indicators that show lower-than-anticipated corporate profitability, general government expenditure, and core industries output.
Inflation
Headline CPI inflation increased to 5.1% in June 2024 due to higher-than-expected food inflation. Fuel remained in deflation for the tenth consecutive month. Core inflation moderated to a historic low in May and June.
Food inflation, weighing around 46% in the CPI basket, contributed to more than 75% of headline inflation in May and June. Vegetable prices increased sharply and contributed about 35% to inflation in June. High inflation pressures persisted across other major food items also. The impact of the revision in milk prices and mobile tariffs needs to be watched.
- A degree of relief in food inflation is expected from the pick-up in the southwest monsoon and healthy progress in sowing. Buffer stocks of cereals continue to be above the norms. Global food prices showed signs of easing in July, after registering increases since March 2024.
Liquidity and Financial Market Conditions
System liquidity transited from deficit in June to surplus conditions in July. In tune with the changing liquidity conditions.
On recent volatility
In the last few days, global financial markets have seen turmoil on concerns of the growth slowdown in a major economy, flare-up in geopolitical tensions in the Middle East, and the unwinding of the carry trade.
These developments have implications for emerging market economies. In this context, it would be important for market participants to keep in mind the strength of India’s macroeconomic fundamentals, which remain robust. India has built strong buffers that impart resilience to the domestic economy from such global spillovers.
Financial Stability
Alternative investment options are increasingly appealing to retail clients, posing funding challenges for banks as bank deposits lag behind loan growth. Consequently, banks are resorting more to short-term non-retail deposits and other liability instruments to meet the growing credit demand. This approach could potentially expose the banking system to structural liquidity problems. Therefore, banks should focus on increasing household financial savings. They can achieve this by introducing innovative products and services and fully utilizing their extensive branch network.
Sectors in which pre-emptive regulatory measures were announced by the Reserve Bank in November last year have shown moderation in credit growth. However, certain segments of personal loans continue to witness high growth. Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from a macro-prudential point of view.
The third issue that is attracting RBI’s attention is home equity loans, or top-up housing loans as they are called in India, which have been growing at a brisk pace. Banks and NBFCs have also been offering top-up loans on other collateralized loans like gold loans.
External Sector
In Q1:2024-25, the merchandise trade deficit widened as imports grew faster than exports on account of buoyancy in services exports, and strong remittance receipts. RBI expects CAD to remain eminently manageable during the current financial year
On the external financing side, FPIs turned net buyers in the domestic market from June 2024 with net inflows of US$ 9.7 billion during June-August (till August 6) after witnessing outflows of US$ 4.2 billion in April and May.
Foreign direct investment (FDI) flows picked up in 2024-25 as gross FDI rose by more than 20% during April-May 2024, while net FDI flows doubled during this period compared to the corresponding period of the previous year
Additional Measures:
Increased Transaction Limit for Tax Payments through UPI
The current transaction limit for UPI is ₹1 lakh, excluding certain payment categories with higher transaction limits. However, it has been decided to raise the UPI limit for tax payments from ₹1 lakh to ₹5 lakh per transaction.
Introduction of ‘Delegated Payments’ within UPI:
RBI proposes to introduce a “Delegated Payments” feature in UPI. This allows an individual, known as the primary user, to authorize another individual (the secondary user) to execute UPI transactions from the primary user’s bank account. This feature eliminates the need for secondary users to link their own bank accounts to UPI, thus expanding the usage and reach of digital payments.
Introduction of Continuous Cheque Clearing:
Cheque clearing, currently processed through the Cheque Truncation System (CTS) operates in batch mode with a clearing cycle of up to two working days. We plan to expedite the clearing cycle by implementing continuous clearing with ‘on-realisation-settlement’ in CTS. This new system will ensure cheques are cleared within hours of their presentation, thereby speeding up cheque payments, benefiting both the payer and the payee.
Increased Reporting Frequency of Credit Information to CICs:
Currently, lenders report credit information to Credit Information Companies (CICs) monthly or at agreed shorter intervals. RBI proposes to increase reporting frequency to every two weeks or even shorter intervals. This change will enable faster credit information updates, particularly when loans are repaid, allowing lenders to make more accurate risk assessments of borrowers.
Public Repository for Digital Lending Apps:
To enhance the orderly growth of the digital lending ecosystem in India and address issues related to unauthorized digital lending apps (DLAs), the RBI is proposing to create a public repository for DLAs provided by regulated entities. The regulated entities will be required to report and update information about their DLA in this repository, helping consumers steer clear of unauthorized lending apps.
Conclusive remarks from the Governor:
Under the current monetary policy setting, inflation and growth are evolving in a balanced manner and overall macroeconomic conditions are stable; but there is more distance to cover. The progress towards the goal of price stability has been uneven due to large and persistent supply side shocks, especially in food items. Therefore, there is a need to remain vigilant to ensure that inflation moves sustainably towards the target while supporting growth. This approach would be net positive for sustained high growth.