RBI MPC Meeting April 2024 Highlights: RBI holds repo rate at 6.5%

52-53% of loans are linked to external benchmarks where transmission is faster. Remaining transmission will happen over a period of time, says D-G Swaminathan

CBDC-R currently has 46 lakh users and 4 lakh merchants. Total transactions are at around 2.2 crore, he added.

We don’t follow the US Fed’s footsteps. Our policy is governed and determined by domestic circumstances. Rate action is linked to the evolving path of inflation, the Governor added.

We will undertake a study to assess potential growth and real rate after final GDP numbers for FY24 are released May-end, he added.

So that is our primary objective that we must align inflation with the target, the Deputy Governor added.

In view of adverse climate events, it is likely to remain high, he added.

Some market participants misusing relaxation in documentary evidence for interest rate currency derivatives as tantamount to no underlying, which is not the case and a violation of the law, says the RBI.

RBI extended the deadline for implementation of currency derivatives circular due to requests from several market participants, the Governor said.

Temperatures are going to be above normal in the months of April, May and June. So we have to really watch what impact it has on especially on food crops, the Governor said at the post monetary policy press conference.

We have been building reserves depending on the prevailing situation, and that endeavour continues because it acts as a buffer against future risks and adds to the strength of national balance sheet, Das added.

The Reserve Bank will continue to focus on preserving financial stability. The central bank will continue to promote a payment system that is robust, resilient and future ready, Shaktikanta Das added.

We derive satisfaction from the progress made on the disinflation. However, the task is not yet finished, Das added.

“The policy overall is on expected lines. So, it demonstrates that the Reserve Bank, the market participants, the market players, and perhaps the media and analysts,” says the RBI Governor.

“MPC policy took recognition of fluidity of global narratives, even as domestic dynamics have stayed favorable. This suggests that when needed, the aim of financial stability may even precede inflation management. We have long maintained that the RBI policy has been somewhat pegged to the Fed, specifically over the last two years, even as it formally targeted inflation. This seems fair, as external dynamics have been fluid, implying that the policy prerogative needs to be flexible for ensuring financial stability,” Arora said.

“The fluidity of global narratives and policy repricing, in conjunction with the near-term problem-of-plenty on INR/bonds, could make it arduous for the RBI to find a balance in its policy biases. We maintain the RBI’s tone will slowly tiptoe to ‘Gracklish’ from the usual ‘Hawk-Dove’ signaling, implying a non-committal stance and limited definite forward guidance ahead. While bull-steepening of India bonds looks to be a popular trade, consistent repricing of Fed cuts could spill over into the RBI’s reaction function and will be cyclically noisy for bonds/FX,” she added.

The RBI has decided to permit eligible foreign investors in the International Financial Services Centre (IFSC) to also invest in Sovereign Green Bonds (SgrBs). This is with a view to facilitating wider non-resident participation in SgrBs.

At present, foreign portfolio investors (FPIs) registered with SEBI are permitted to invest in SGrBs under the different routes available for investment by FPIs in government securities.

A scheme for investment and trading in SGrBs by eligible foreign investors in IFSC will be notified separately in consultation with the Government and the IFSC Authority.

At present small finance banks are permitted to use only interest rate futures for proprietary hedging. It has now been decided to allow small finance banks to use permissible rupee interest derivative products, the Governor said. This will allow further flexibility for hedging interest rate risks and enhancing resilience, he added.

Need has arisen to undertake comprehensive review of LCR framework for banks. Draft framework will be issued shortly, Das added.

This will enable testing of resilience of CBDC, Shaktikanta Das added.

The Reserve Bank will continue to focus on preserving financial stability, and promoting a system that is robust, resilient, and future ready. As inflation is on a declining trajectory, we should not lower our guard, Das added.

RBI will permit use of third-party UPI apps for making UPI payments from PPI wallets.

PPI wallet holders are no longer have to be completely dependent on the PPI issuer, but they can use any other third party app, which is operating under the UPI. This will further enhance customer convenience and boost adoption of digital payments for small value, he added.

The RBI said a mobile application of the Retail Direct portal is being developed to further improve ease of access by retail investors to the government securities market.

The app will enable investors to buy and sell instruments/government securities (Government Dated Securities, State Development Loans, Treasury Bills and Sovereign Gold Bonds,) on the go, at their convenience. The app will be available for use shortly, Governor Shaktikanta Das said.

RBI Retail Direct Scheme, launched in November 2021, gives access to individual investors to maintain gilt accounts with RBI and invest in government securities.

This which will help us when the cycle turns or when it rains heavily, he added.

ECBs and NRI deposits recorded higher net inflows vis-a-vis previous year. Forex reserves reached an all time high $645.6 billion as of March 29, 2024. We remain confident of meeting external financing requirements comfortably, Das added.

India’s current account deficit narrowed significantly on account of a moderation in merchandise trade deficit, coupled with robust growth in services exports and strong remittances, says Das.

Cost of receiving remittances is coming down in India. FY24 CAD is expected to remain viable and eminently manageable, Das added.

More than 1000 circulars have been withdrawn and RBI will continue to follow consultative approach, he added.

Financial sector players, by and large operate with public money, be it of depositors in banks and select NBFCs or investors in bonds and other financial instruments. They should always be mindful of this aspect, Das said.

RBI engaging with regulated entities and stakeholders for simplifying regulations and reducing compliance burden, he added.

Rupee was the most stable among major currencies in FY24. The Indian rupee exhibited lowest volatility in 2023-24. The relative stability of the Indian rupee reflects India’s sound macroeconomic fundamentals, financial stability improvements in our external position, Das said.

Liquidity conditions improved during February and March, in the wake of increased government spending. Reserve Bank’s market operations, and the return leg of US dollar and Indian Rupees sale by swap auction. WACR hovered near the repo rate since last policy meeting, Das said on liquidity conditions.

Monetary transmission continues to be work in progress. Looking ahead, reserve bank will remain nimble and flexible in its liquidity management through fine tuning operations in both repo and reverse repo, Das added.

According to Das -

CPI inflation in q1 is projected at 4.9%, q2 at 3.8%, q3 at 4.6% and q4 at 4.5%.

Inflation has come down significantly, but remains above the 4% target

Food inflation continues to exhibit considerable volatility, which is impeding the ongoing disinflation process

The strong growth momentum, together with our GDP projections for 2425 give us the policy space to unwaveringly focus on price stability

Ongoing effort is to ensure fuller transmission of policy actions and anchoring of household inflation expectations

Two years ago, around this time, when CPI inflation had peaked at 7.8% in April 2022 the elephant in the room was inflation. The elephant has now gone out the elephant has now gone out for a walk, and appears to be returning to the forest.

It is essential in the best interest of the economy that CPI inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished

Frequent and overlapping adverse climate shocks pose upside risks to the outlook for international and domestic food prices, he added.

Q1 FY25 growth is projected at 7.1%, Q2 at 6.9%, Q3 and Q4 at 7% each, says the RBI Governor.

This is significantly higher than ₹26.4-lakh crore in FY23, he added.

Growing rural demand, improving employment conditions and informal sector activity, moderating inflationary pressures and sustained momentum in manufacturing and services sectors should boost private consumption, Das added.

The resilience in cement production, together with strong growth in steel consumption, and production and import of capital goods augur well for the investment cycle, the Governor added.

The domestic economic activity continues to expand at an accelerated pace, supported by fixed investment and improving global environment. The second advanced estimates placed the real GDP growth at 7.6%, the third successive year of 7% or higher, he added.

“In the last monetary policy statement, if you recall, I expressed concerns about the high levels of public debt in both advanced and emerging market economies. These are dormant risks, which could erupt abruptly,” he added.

Global trade is expected to grow faster in 2024 although weaker than its historical average. Services inflation in advanced economies remains sticky, the Governor added.

The MPC remains vigilant to the upside risks to inflation. Monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past monetary policy actions. The MPC will remain resolute in its commitment to aligning inflation to the target, Das added.

Growth has continued its momentum, surpassing all projections. The headline inflation has eased to 5.1% during both January and February, he added.

The RBI’s six-member monetary policy committee kept the policy repo rate on hold at 6.50 per cent at its first meeting of FY25 as retail inflation remains above its 4 per cent target. 

The central bank persisted with its “withdrawal of accommodation” stance. Both decisions were by a majority of 5 out of 6 members.

Equity benchmarks BSE Sensex, NSE Nifty traded flat at the open on Friday, ahead of the Reserve Bank of India’s monetary policy decision, where the central bank is expected to maintain its key interest rate for a seventh straight meeting.

The NSE Nifty 50 index was down 0.13% at 22,486.40, while the BSE Sensex added 0.08% to 74,287.02.

​ Indian markets are expected to open in the negative​ on Friday amid the focus on the Reserve Bank of India’s credit policy and global cues. Analysts predict a gap down opening of around 100 points for Nifty due to the unabated selling by foreign portfolio investors. The major focus on Friday will be on the RBI statements after the rate-meet outcome, with expectations for a rate pause at the first MPC meeting for FY25. Economic growth has continued to remain strong, with above-expected GDP growth during Q3 FY’24. The RBI’s focus is likely to be on liquidity management and withdrawal of accommodation to keep inflation well anchored. Traders are also awaiting weekly unemployment claims and trade balance data from the US.

Vivek Singhal, CEO, Smartworld Developers, said an interest rate cut in the upcoming RBI meeting will augur well for India’s real estate market. 

A rate cut will lower borrowing costs, stimulate demand, and foster investor confidence.

“Such a move has the potential to unleash a wave of growth and revitalisation in the sector. As consumers prioritise stability and security in their investment decisions, a lower interest rate environment would greatly enhance homebuyer sentiment and bolster affordability -- a critical determinant within the housing market landscape,” he said.

On expectations from the RBI, Group CEO of Housing.com Dhruv Agarwala said the central bank is likely to maintain a status quo on key policy rate in its April 5 policy amid strong economic growth. 

“Even though the year-long downward trend in core inflation is encouraging, inflation is still close to the upper band of the apex bank’s 2-6 per cent target, leaving little room for any rate cut during this policy cycle,” he said, adding considering interest rates are likely to remain stable, the demand for housing in the country would continue to get a boost.

The market is broadly expecting that the RBI will maintain status quo on policy rates in the MPC (Monetary Policy Committee) meeting. However, the critical factor to watch out for is the indication given by the central bank regarding its future course of action, says Rajani Sinha, Chief Economist, CareEdge.

The Reserve Bank of India (RBI) has kicked off liquidity management operations in the new financial year by conducting four variable rate reverse repo (VRRR) auctions — two each on April 2 and April 3 — to suck out surplus liquidity from the banking system and reinforce its “withdrawal of accommodation” monetary policy stance.

Banking system liquidity has turned into a surplus due to March month-end spending by the government. The liquidity surplus was at ₹1.47 lakh crore as of April 2.

Retail inflation rate stayed almost flat at 5.09 per cent in February compared to the preceding month, according to official data released on Tuesday.

Inflation based on the Consumer Price Index (CPI) was at 5.1 per cent in January and 6.44 per cent in February 2023.

According to the data released by the National Statistical Office (NSO), retail inflation in the food basket was at 8.66 per cent in February, marginally up from 8.3 per cent in the previous month.

With the Reserve Bank of India (RBI) fixated on aligning retail inflation with the four per cent target, majority of the members of its rate setting panel are expected to vote to hold the repo rate at 6.50 per cent at their first meeting in the new financial year.

The repo rate, which is the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches, was left unchanged in all six bi-monthly monetary policy reviews in FY24 as retail inflation stayed above the monetary policy committee’s four per cent target.

This rate was last increased from 6.25 per cent to 6.50 per cent in February 2023.