Monetary Policy Review: Repo Rate Retained; GDP Forecast Hiked, Inflation Unchanged


Monetary Policy Review: Repo Rate Retained; GDP Forecast Hiked, Inflation Unchanged

The Reserve Bank of India (RBI) Friday maintained policy interest rates  and its monetary stance for the eighth straight review meeting. There were however, concerns of a likely spike in food prices, but the cracks in the  Monetary Policy Committee (MPC)  widened in favour of easier money. It surprisingly raised the FY25 growth forecast, sending equity index higher.

Positive on growth and inflation: Despite a relatively higher base, policymakers baked in the prospect of higher consumption and a continued revival in the state-led investment cycle to raise the fiscal year growth forecast by 20 basis points to 7.2%. One basis point is a hundredth of a percentage point.

Inflation  remained a bother for the central bank with an uptick in prices of global commodities, which could spill over into higher product prices, and the potential impact of rains on food prices, pushing behind the expectation of the beginning of an easing cycle.

"While the MPC took note of the disinflation achieved so far without hurting growth, it remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation," said Governor Shaktikanta Das after the conclusion of the MPC meeting. " We need a descent of inflation to the 4 per cent target on a durable basis."

Irrespective of the monetary stance and the new government being a coalition the central bank expects the Indian economy’s march to continue with it firing on all cylinders. "Domestic economic activity has maintained resilience," said Das. "Manufacturing activity continues to gain ground on the back of strengthening domestic demand."

Inflation could be flattering to deceive as the next few months could see a dip due to base effect, said Das.

While headline Consumer Price Index inflation was at 4.83% in April – well within the MPC’s tolerance band of 2-6% - food inflation accelerated to a four-month high of 8.7%. Meanwhile, India’s GDP growth outstripped expectations and expanded 7.8% in Jan-March, lifting the full-year growth for FY24 to a world-beating 8.2%, provisional data showed.

Repo rate remains  at 6.5: The Repo rate, the rate at which the central bank lends to banks, will remain at 6.5% as four members voted for status quo while two wanted a 25 basis points reduction. All other rates remain. The division in the MPC widened with external member Ashima Goyal joining J.R. Varma in voting for a quarter point cut and a shift in the monetary stance of `focussed on the withdrawal of accommodation. A basis point is a hundredth of a percentage point.

RBI does not follow the Fed: Governor Das tempered the expectations on monetary easing guidance after the European Central Bank  cut policy rate for the first time since 2019, reiterating that Indian monetary policy  is on its own path and doesn’t `follow the Fed.’

"There were signs of a more divided policy committee, with one additional member voting for a softening in stance as well as policy direction," said Radhika Rao economist at DBS Bank. “The mix of strong growth and above-target inflation does not make a case for a shift to a less restrictive policy setting yet, validating our view that rate easing is not on the cards this year."

Market positive: Equity indices climbed, with the Nifty 50 clawing back above the 23,000 mark after Das raised the full-year growth forecast that came as a surprise following the poll outcome that is expected to reduce the incoming administration’s elbowroom in driving capex given its likely enhanced thrust of welfarism.


No worries on heavy inflows from global bond inclusion

RBI Governor Das on June 7 said there is no worries on expected heavy inflows from global bond inclusion, which is expected by the end of this month. "The RBI has a number of instrumentalities ,we have managed it in the past, we will manage it this time also. No worries on that," Das said during a post policy media conference.

JPMorgan Chase & Co will add Indian government bonds to its benchmark emerging-market index, a keenly awaited event that could drive billions of foreign inflows to the nation’s debt market.

The index provider will add the securities to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024.

On May 21, Moneycontrol reported that according to a senior finance ministry official, concerns over ‘hot money’ are not immediate given that the amount invested by foreign investors under the fully accessible route so far is not too large.

As per Clearing Corporation of India (CCI) data, investments under the FAR route stood at Rs 1.74 lakh crore as on June 7. FAR or Fully Accessible Route was introduced by the Reserve Bank of India in April 2020, allowing non-residents to invest in specified government bonds without any restrictions.


RBI plan against UPI, digital payment frauds

Amid increasing instances of digital payment fraud, the RBI has proposed setting up a digital intelligence platform. To advance this initiative, the central bank has constituted a committee to examine the various aspects of forming a digital public infrastructure for a digital intelligence platform.

Digital payment fraud  has witnessed a staggering surge in the country in the last few years. According to the annual report by the central bank, the number of cases reported to the RBI jumped by 300% to around 36,000 in FY23, compared to around 9,000 cases in FY22.

In the RBI Statement on Developmental and Regulatory Policies, the central bank said, "The Reserve Bank, over the years, has undertaken a number of measures for the safety and security of digital payments to maintain public confidence in digital payment systems. Sustaining such confidence would require minimising incidence of fraud. Many frauds occur by influencing unsuspecting victims to make the payment or share credentials. While the payment ecosystem (banks, NPCI, card networks, payment aggregators, and payment apps) take various measures on an ongoing basis to protect customers from such frauds, there is a need for network-level intelligence and real-time data sharing across payment systems."

 Plans to prevent Aadhaar-based payment fraud: Earlier, the RBI took steps to bring a standardised secure onboarding process for all to curb online fraud related to Aadhaar-enabled payment system (AePS). The central bank said, "To enhance the security of AePS transactions, it is proposed to streamline the onboarding process, including mandatory due diligence, for AePS touchpoint operators, to be followed by banks. Additional fraud risk management requirements will also be considered. Instructions in this regard shall be issued shortly," according to RBI.

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