RBI Monetary Policy June 2023 Key Highlights: Repo Rate Unchanged

RBI Monetary Policy Repo Rate

The Reserve Bank of India’s (RBI) monetary policy committee (MPC), led by RBI governor Shaktikanta Das, has decided to maintain the repo rate at 6.5%. This means that the interest rate charged on loans by commercial banks will remain unchanged. The governor also mentioned that India’s Consumer Price Index (CPI) inflation has decreased in recent months. Furthermore, the RBI has maintained its forecast for the country’s Gross Domestic Product (GDP) for the current financial year.

Key Highlights of the RBI MPC Decision

Repo Rate

The Monetary Policy Committee (MPC) has made the decision to maintain the repo rate at 6.5%. This decision was taken unanimously by all the members of the committee. It is the second consecutive time that the policy repo rate has remained unchanged at this level.

Other Key Rates

The Standing Deposit Facility Rate will be kept unchanged at 6.25%. Similarly, both the Marginal Standing Facility Rate and Bank Rate will remain unchanged at 6.75%. These rates have been maintained at their current levels.

Inflation

The RBI has projected the Consumer Price Index (CPI) inflation for the financial year 2023-24 at 5.1%.

• The inflation projections have been further broken down for each quarter, with the RBI forecasting inflation at 4.6% for Q1FY24, 5.2% for Q2FY24, 5.4% for Q3FY24, and 5.2% for Q4FY24.
• The RBI Governor expressed concern about the inflation still being above the target of 4 percent and emphasized that having inflation within the range of 2-6% is not sufficient.
• The risks to the CPI inflation forecast were stated to be evenly balanced. The goal is to achieve the targeted 4% inflation in the future.
• The RBI Governor also highlighted that CPI inflation is expected to remain above the target of 4% throughout the 2023-24 period, based on their forecasts.
• Growing inflation is a cause for concern, given the uncertainties related to the monsoon season, international commodity prices, and volatility in the financial markets.
• Inflation poses a risk to the economy in light of these factors.

India’s GDP Projection in 2023-24

The MPC of the RBI has decided to keep the GDP growth rate unchanged at 6.5 percent.

• The quarterly breakdown of the GDP growth rate for the financial year 2023-24 is projected to be 8% in Q1FY24, 6.5% in Q2FY24, 6% in Q3FY24, and 5.7% in Q4FY24.
• The RBI has expressed its commitment to ensuring orderly completion of the government’s market borrowing program within the specified timeframe. They will remain flexible in managing liquidity to achieve this objective.
• RBI Governor Shaktikanta Das has stated that the MPC will take necessary monetary actions to anchor inflation expectations firmly.
• He also announced that the real policy rate will continue to be positive, indicating that it will remain above the inflation rate.
• The average liquidity in the banking system is currently in surplus, and it may increase further as the deposit of ₹2,000 banknotes takes place in banks.

Rupay Prepaid Forex Cards

• In addition to the decisions made, the RBI has granted permission to banks to issue Rupay prepaid forex cards.
• This move is accompanied by an expansion of the e-rupee voucher, allowing non-bank companies to independently issue such instruments.
• Governor Shaktikanta Das emphasized that the RBI will maintain vigilance and proactively address emerging risks to both price stability and financial stability.
• The central bank is committed to taking necessary measures to ensure a stable economic environment.

Net FPI inflow in FY24

• RBI Governor Shaktikanta Das announced that the net Foreign Portfolio Investment (FPI) inflows for the fiscal year 2023-24, as of June 6, amount to $8.4 billion.
• This represents a decrease compared to the previous fiscal years, with net FPI inflows of $14.1 billion in 2021-22 and $5.9 billion in 2022-23.
• The central bank continues to monitor and assess the trends and impact of foreign portfolio investments on the Indian economy.

Shrinkage in Surplus Liquidity

• During the months of April and May, the average daily absorptions under the liquidity adjustment facility (LAF) amounted to ₹1.7 lakh crore, indicating a decrease in surplus liquidity compared to the ₹2.9 lakh crore observed throughout the fiscal year 2022-23.
• This reduction in excess liquidity can be attributed, among other factors, to the maturity of targeted longer-term refinancing operations (TLTROs).
• Additionally, the seasonal increase in circulating money and the accumulation of government cash balances during this period contributed to moderating excess liquidity.
• Governor Shaktikanta Das acknowledged that there is an uneven distribution of liquidity within the banking sector, as evidenced by the prevalence of surplus liquidity and the higher utilization of the marginal standing facility (MSF) by certain banks.
• To address this situation, the RBI conducted two 14-day Variable Rate Reverse Repo (VRR) auctions in February and March 2023, each totaling ₹50,000 crore, with the aim of restoring balance in liquidity distribution.

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