RBI MPC Meeting February 2024 Highlights: Repo rate unchanged at 6.5%; action on Paytm is in the best interest of customers, says Shaktikanta Das

Reserve Bank Governor Shaktikanta Das said that there are no systemic worries and the action on Paytm was driven by a “lack of compliance” at Paytm.

Deputy Governor Swaminathan J said the actions against the fintech have been taken due to “persisted non-compliance”.

The share price of One 97 Communications, which operates the Paytm brand, declined ₹49.60 or 9.99% to trade at ₹446.65 on NSE. 

“The Reserve Bank of India (RBI) Governor delivered a well-balanced policy, aligning largely with the market expectations. RBI’s GDP growth projection of 7% for FY25 is quite bullish and reflects the Central Bank’s confidence in sustenance of the growth trajectory. While overall inflation is projected at average of 4.5% for FY25, it is important to note that the disinflationary trend is not being sustained, with marginal increase in inflation in the third and fourth quarter of FY25. 

“Going forward, we feel that RBI would remain cautious given the risk posed by high food inflation. Healthy economic growth gives room to the Central Bank to maintain status quo for some more time. However, in the second half of the year, as domestic inflationary concerns recede and the US Fed starts cutting rates, we can expect a shallow rate cut by RBI. On the liquidity front, RBI will continue to intervene through appropriate tools as required.”

This is the sixth straight halt in the past year. Since the April monetary policy in 2023, the RBI has maintained the repo rate at 6.5%. The Reserve Bank of India’s policy decision was mostly based on market expectations and will have little influence on the domestic market. The status quo in policy rates is a non-event for the common man because banks are likely to take a wait-and-see strategy, waiting for further policy cues in the coming months before adjusting their rates. RBI keeps the FY24 inflation forecast unchanged at 5.4% but lowered it for the last quarter of this fiscal. And, for FY25, Consumer price inflation is seen at 4.5%

The market may not respond significantly, and investors may choose to wait and watch strategy. Banking, finance, and consumer durables are likely to profit from stable interest rates, while technology, healthcare, and utilities would be less affected.

“The outcome of the three-day Monetary Policy Committee meeting aligns with our expectations, as the repo rate remains unchanged at 6.5% and a continued effort towards reducing money supply in the economy is maintained. The cumulative effect of policy repo rate increases is still working its way through the economy through gradual decline in inflation numbers, but geopolitical events and their impact on supply chains and commodity prices are key sources of upside risks to inflation. Although no specific timeline has been indicated for reducing repo rates, it is anticipated that the Reserve Bank of India will initiate this process only after observing a similar move by the United States, aiming to mitigate the risk of capital outflows from India.”

Banks and NBFCs are performing well, Das added.

Markets are running ahead of Central banks’ possible actions, Das added.

This is to ensure transparency and in the best interest of customers, Das added.

We try to keep liquidity so that overnight call rate remains around repo rate, Das added.

On liquidity, the Governor further said:

Due to various autonomous factors, liquidity has been fluctuating

RBI will remain active in liquidity management

It does not militate against fungibility, he added.

On the issue, Shaktikanta Das said that If the government wants to give support for specific use then programmability of CBDC will help.

Our emphasis is always on bilateral engagement with regulated entities with focus on nudging them to take corrective action, Das said.

On the Paytm issue and the broader regulatory issues, Das further said:

• Sufficient time is given to take corrective actions. Restrictions are proportionate to the gravity of situation.
• When such constructive engagement does not work, we go for imposing supervisory/ business restrictions
• All our actions are in the best interest of systemic stability and customer interest
• Individual entities should be mindful of these aspects for their long-term success
• RBI will issue FAQ next week on supervision related queries
• RBI will continue to support innovation in the fintech space
• We have been engaged with Paytm for quiet some time

Banks prioritising their margins impeding lending rate transmission, the D-G added.

Such supervisory actions are invariably preceded by months and at times here, so bilateral engagement, where we don’t not even, pointing out, not only pointing out the deficiencies but also provide a more than adequate time for them to take corrective action, Swaminathan said.

It’s incumbent upon us to protect the interests of the consumer and thereby particularly protecting the stability of the financial system so these actions are to be seen in that particular context, the D-G added.

The intent is to keep the call rates around the repo rates. The stance is all about future course of policy rates, Patra added.

External sector of the economy remains resilient. The current account deficit is expected to be eminently manageable, Das added.

Systemic, sectoral and institutions specific signs of stress are being proactively monitored. and acted upon, wherever necessary, the Governor added.

Globally, markets are front running central banks in anticipation of policy pivots, But central banks remain apprehensive and await a more durable alignment of inflation, with the targets, the Governor added.

CPI inflation inflation is moderating with intermittent interruptions, spikes. We have to remain vigilant about the incoming data and the outlook, our endeavour to achieve 4% inflation on a durable basis has to continue, the Governor added.

Digital rupee users will soon be able to execute transactions in areas with limited internet connectivity as the RBI on Thursday announced that offline capability will be introduced on the Central bank digital currency (CBDC) pilot project.

Reserve Bank of India Governor Shaktikanta Das said that programmability-based additional use cases will be introduced as part of the pilot project.

RBI launched a pilot of the retail CBDC in December 2022 and achieved the target of having 10 lakh transactions a day in December 2023.

It can be noted that other payment platforms, especially the very popular Unified Payments Interface (UPI), already offer offline possibilities.

“it is proposed to introduce an offline functionality in CBDC-R (Retail) for enabling transactions in areas with poor or limited internet connectivity,” Das said while announcing the bi-monthly monetary policy review.

“With the fundamentals of the Indian economy remaining strong despite all global headwinds and inflation well under control, the RBI once again decided to keep the repo rates unchanged at 6.5%, thus extending the festive bonanza that it gave to the homebuyers in its last two policy announcements. Thus, homebuyers retain their advantage of relatively affordable home loan interest rates,” says Anuj Puri.

“Going forward, we can expect the momentum in housing sales to continue, significantly aided by the unchanged repo rates which will keep home loan interest rates attractive and also signal ongoing robustness of India’s positive economic outlook,” Puri added.

“RBI has effectively addressed emerging concerns around continued high systemic liquidity deficit. The deficit since December is due to a confluence of seasonal and ad-hoc macro factors, and should ease on a sustainable basis over the next 2-3 months, says Chaudhuri. 

“With RBI’s continued intervention in managing call money rates at close to the repo rate, I don’t expect deficit to rise up to the highs of over ₹3-lakh crore, on a durable basis, once again during the rest of 2024. A union budget focused on fiscal consolidation followed by RBI’s assurance to maintain comfortable liquidity levels should provide a breather to our debt markets, till the actual shift in monetary policy occurs during Q1 FY25,”Chaudhuri added.

RBI has remained focused on aligning inflation target of 4% on durable basis, he added.

If we are interested in the long-term growth of our economy, then we need a regime of low and stable inflation. That is why we remain focused on bringing the inflation to the target on durable basis, Das said.

Current account deficit for both 2023-24 and 2024-25 are expected expected to be eminently manageable, he added.

As on February 02, India’s forex reserves stood at $622.5 billion, Das added. World Bank estimates inward remittances of $135 million for India in FY24.

With technological advancements, alternative authentication mechanisms have emerged in recent years. Therefore, to facilitate adoption of alternative authentication mechanisms for enhancing the security of digital payments, it is proposed to put in place of principal based framework for authentication of such transaction.

Programmability will facilitate transactions for specific or targeted purposes, while offline functionality will enable these transactions in areas with limited internet connectivity, the Governor added.

This will enable the customer have a clear idea on what is the actual annual interest rate that one pays (fee should be loaded to interest rates), Das added.

Net FPI inflows of $32.4 billion as of Feb 6 vs net outflows of $6.7 billion year ago, Das added.

This will provide more flexibility to resident entities to hedge their gold price risks, he added.

The Reserve Bank’s extensive regulatory framework for electronic trading platforms was issued in 2018, in view of the subsequent developments in markets products and technology, he added.

Financial parameters of non banking financial companies are also improving. Good governance, robust risk management, compliance culture and customers interest are of paramount importance for the safety and stability of the financial institutions, the Governor added.

Rupee relative stability in the recent period, despite a stronger US dollar and elevated US Treasury yields, reflects the strength and stability of the Indian economy, the governor added.

We will deploy an appropriate mix of instruments to ensure financial stability, he added.

Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of four percent and our efforts to bring it back to the target on durable basis, he added.

While the short-term rates have fluctuated, long-term rates are relatively stable, the Governor added.

With govt spend picking up and augmenting system liquidity, the RBI undertook 6 VRRR auction during Feb 2-7 to absorb the surplus, Das added.

Job on inflation control not yet finished. MPC prioritised inflation over growth for the last two years, he added. 

CPI for FY25 projected at 4.5%, Q1 at 5%, Q2 at 4%, Q3 at 4.6%, Q4 at 4.7%, per the Governor.

Real GDP Q1 at 7.2%, Q2 at 6.8%, Q3 at 7% and Q4 at 6.9%, per the RBI Governor

This will improve employment conditions and moderate inflation, together with a rebound in agricultural activity should push up household consumption, he added.

While the services sector expected to remain resilient, the Governor added.

Reducing debt burden is essential to create fiscal space for new areas of investment, he added.

Monetary policy should continue to be activity dis-inflationary, he added.

The MPC will carefully monitor any signs of generalisation of food price pressures which can fritter away, against in easing of core inflation, the governor added.

The MPC also decided by a majority of five out of six members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.

The Reserve Bank of India’s Monetary Policy Committee has decided to keep the policy repo rate unchanged at 6.5%. 

The six-member monetary policy committee voted by 5:1 majority to keep the repo rate unchanged at 6.50 per cent in its last meeting of FY24 as retail inflation continues to be above its target of 4 per cent.

This is the sixth meeting on the trot that the MPC has maintained a status quo on the repo rate (the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches).

Similar to the benchmark BSE Sensex, stocks of major banks such as HDFC Bank, SBI, Axis Bank and IndusInd Bank have jumped in early trade on Thursday ahead of RBI’s announcements on policy repo rate. Within the Sensex pack, PSB major State Bank of India gained the most at 1.4%, followed by IndusInd Bank and HDFC Bank.

The rupee has gained 4 paise to 82.92 against US dollar, awaiting comments from the RBI on liquidity, while eyeing the US Treasury yields. 

India’s equity benchmarks BSE Sensex and NSE Nifty opened higher on Thursday ahead of the Reserve Bank of India’s monetary policy decision, where the central bank is expected to keep its key interest rate unchanged for a sixth consecutive meeting.

The NSE Nifty 50 index rose 0.36% to 22,009.65, while the S&P BSE Sensex was up 0.45% at 72,473.42, as of 9:15 a.m.

To gauge the movement of your existing loan interest rates in 2024, the first criterion is whether it is a fixed or floating rate loan. In a floating rate loan, the rate would move as per the underlying variable. However, it was not smooth earlier. Things improved subsequent to a Reserve Bank of India (RBI) circular in September 2019.

Previously, one of the pet peeves of bank loan customers, and rightfully so, was that banks were quick to raise loan rates when interest rates rose but slow to reduce when rates were easing. In those days, floating rate loans were linked to a benchmark internal to the bank.

Domestic markets are expected to open mildly positive ahead of the RBI policy meeting at 10 am. Gift Nifty at 22,054 against Nifty futures close of 22,003. Though global stocks are shining, analysts expect the market to open flat ahead of the RBI meeting, which, according to many, will reveal a status-quo stance on rates.

The focus will be on RBI’s liquidity measures, as the central bank is watching this carefully and will inject liquidity as required. Analysts expect the monetary policy stance to remain at “withdrawal of accommodation” for now.

Coming close on the heels of the interim budget which maintained the status quo on policy front, the Reserve Bank is likely to continue with the pause on the short-term lending rate in its upcoming bi-monthly monetary policy this week as retail inflation is still near the higher end of its comfort zone, say experts.

It is almost a year since the Reserve Bank has kept the short-term lending rate or repo rate stable at 6.5 per cent. The benchmark interest rate was last raised in February 2023 to 6.5 per cent from 6.25 per cent to contain inflation driven mainly by global developments.

In a surprise move, the Reserve Bank of India (RBI) on Tuesday conducted two one-day variable rate reverse repo (VRRR) auctions to drain out liquidity from the banking system and re-anchor overnight money market rates at a higher level.

Market players said this is probably the first instance of two VRRR auctions being conducted on the same day. In the first VRRR auction, the RBI received offers from banks to deploy funds for a day aggregating ₹27,538 crore, against the notified amount of ₹75,000 crore. The central bank absorbed these funds at a weighted average rate of 6.49 per cent.

A status quo in the repo rate is nearly certain in the monetary policy committee (MPC) meeting later this week. Rather, the MPC narrative around key macro variables (eg., inflation, liquidity) will be of keen interest. 

In particular, banking system liquidity witnessed a rapid tightening in recent months. Any commitment (or the absence of the same) from the Reserve Bank of India (RBI) towards providing liquidity support, will have a meaningful bearing on near term interest rate outlook.

The wholesale price index (WPI)-based inflation rose in December at 0.73 per cent mainly due to a sharp rise in food prices.

The WPI inflation was in the negative zone from April to October and had turned positive in November at 0.26 per cent.

Vegetables, along with pulses and fruits, pushed retail inflation to a four-month high of 5.7 per cent in December. Simultaneously, weak manufacturing dragged industrial growth to an 8-month low of 2.4 per cent in November.

Retail inflation based on the Consumer Price Index (CPI) was 5.5 per cent in November, while industrial growth rate based on the Index of Industrial Production (IIP) were 11.6 per cent in October. After the latest readings, experts see both high-frequency economic indicators to dip on a sequential basis. Also, they do not expect any change in the policy interest rate.

The Monetary Policy Committee (MPC) is expected to keep the policy repo rate on hold as retail inflation remains volatile and continues to be above its comfort level, according to economists.

“We expect the MPC to keep the repo rate on hold at 6.5 per cent. We expect the committee to maintain the monetary policy stance pointed towards a “withdrawal of accommodation” despite deficit liquidity conditions, but the communication is likely to turn materially less hawkish.

“In our view, there is also a non-negligible possibility of the stance being changed to neutral, but it is not our base case,” said Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics, Barclays.

The liquidity deficit in the banking system shrank to about ₹1.40-lakh crore on February 4 from the recent peak of ₹3.46-lakh crore (on January 24th) in view of the government stepping up spending, per RBI data.

The declining liquidity deficit also had a salubrious effect on the overnight money market rates, with the weighted average rate easing to 6.33 per cent from around 6.50 per cent to 6.75 per cent last month.

RBI Governor Shaktikanta Das, in his December 2023 monetary policy statement, noted that the evolution of liquidity conditions has been in alignment with the monetary policy stance.

“Going forward, government spending is likely to further ease liquidity conditions. On our part, the Reserve Bank will remain nimble in liquidity management,” he then said.

The case for rate cut is non-existent. As a base case, despite a fall close to target in Q2, inflation is still likely to stay at 4.6 per cent or marginally above in the coming first half (H1) of the fiscal year and to my mind stabilise above target at an average about 4.6 per cent in H2 given the structural bottlenecks and insufficiently competitive economy. Fresh supply chain disruptions may leave risks more on the upside than downside, says Mridul Saggar on RBI Monetary Policy.

The interim Budget 2024 has set the stage forRBI to go in for 50 basis points cut in repo rates this year, say foreign banks and brokerage houses.

“With government gross borrowing programme likely to decline by 8.5 per cent YOY into the next year, G-Sec Yields (10 year) declined by 12 bps today (Thursday) to 7.06 per cent. The tight fiscal also increases the possibility of policy rate cuts by the RBI. We build in 50 bps rate cut by the RBI in 2HCY24 (second half of Calendar Year 2024)”, Jefferies, a foreign brokerage house, said in an equity research note post the interim Budget.

The Budget 2024-25 is fiscally tighter than market expectations, which is remarkable, given the upcoming elections, with no new social scheme announced or expanded, it added. This also possibly reflects the government’s confidence in re-election, Jefferies has said, adding the 16 per cent jump in capex is better than its expectations.