Monetary policy

 *Top 10 announcements made by RBI Governor Das after MPC meet.*

*RATES.*

The Monetary Policy Committee unanimously decided to keep the policy repo rate unchanged at 6.50%. Consequently, the standing deposit facility rate remains unchanged at 6.25% and the marginal standing facility rate and the bank rate at 6.75%.

*MPC STANCE.*

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.

MPC member Jayanth Varma voted against this part of the resolution. 

*GROWTH.*

The higher rabi crop production in 2022-23 (Apr-Mar), expected normal monsoon, and the sustained buoyancy in services should support private consumption and overall economic activity in 2023.

The government's thrust on capital expenditure, moderation in commodity prices and robust credit growth are expected to nurture investment activity. Weak external demand, geoeconomic fragmentation, and protracted geopolitical tensions though pose risks to the outlook.

Taking all these four factors into consideration, the real GDP growth for 2023-24 is projected at 6.5% with Apr-Jun at 8.0%, Jul-Sep at 6.5% and Oct-Dec at 6.0%. For Jan-Mar, it is predicted at 5.7%. The risks are evenly balanced.

*INFLATION.*

Going forward, the headline inflation trajectory is likely to be shaped by food price dynamics. Wheat prices could see some correction on robust mandi arrivals and procurement. Meanwhile, milk prices are likely to remain under pressure due to supply shortfalls and high fodder costs.

Forecast of a normal south-west monsoon by the India Meteorological Department augurs well for kharif crops, but the spatial and temporal distribution of monsoon would need to be closely monitored to assess the prospects for agricultural production. Crude oil prices have eased, but the outlook remains uncertain. 

Taking into account these factors and assuming a normal monsoon, CPI inflation for 2023-24 is expected to moderate to 5.1% from 5.2% projected earlier, with Apr-Jun at 4.6%, Jul-Sep at 5.2% and Oct-Dec at 5.4%. For Jan-Mar, inflation is seen at 5.2%. The risks are evenly balanced.

LIQUIDITY

Going forward, the central bank will remain nimble in its liquidity management, while ensuring that adequate resources are available for the productive requirements of the economy. RBI will also ensure the orderly completion of the government's market borrowing programme.

The moderation in system liquidity along with its skewed distribution was reflected in firming up of money market rates even beyond the repo rate on few occasions before it came down from May 18 to sub-repo rate levels. However, long term rates have remained broadly stable.

This has led to sharp compression of term spreads in the recent period. The relative stability of long-term yields augurs well for the economy and suggests effective anchoring of market-based long-term inflation expectations.

*BORROWING IN CALL, NOTICE MONEY MARKETS.*

In order to provide greater flexibility for managing liquidity, RBI has been decided scheduled commercial banks, excluding small finance banks can set their own limits for borrowing in call and notice money markets within the prescribed prudential limits for interbank liabilities.

*WIDENING RESOLUTION OF STRESSED ASSETS FRAMEWORK SCOPE.*

RBI has proposed to issue a comprehensive regulatory framework governing compromise settlements and technical write-offs covering all regulated entities. It will also rationalise the extant prudential norms for implementation of resolution plans in respect of exposures affected by natural calamities, drawing upon the lessons from the resolution frameworks introduced during the pandemic. 

This will provide further impetus to the framework and harmonise the instructions across all regulated entities. On Jun 7, 2019, the prudential framework for resolution of stressed assets was introduced, providing a broad principle-based framework.

*DEFAULT LOSS GUARANTEE ARRANGEMENT IN DIGITAL LENDING.*

Based on extensive consultations with various stakeholders, and with the aim of maintaining a balance between innovation and prudent risk management, RBI has been decided to put in place a regulatory framework for allowing default loss guarantee arrangements in digital lending. 

The implementation of the recommendations of the working group on digital lending introduced on August 10, 2022 had stated that the recommendation pertaining to first loss default guarantee is under examination with the central bank.

*RATIONALISATION OF LICENSING FRAMEWORK UNDER FEMA.*

RBI has been decided to rationalise and simplify the licensing framework for authorised persons under Foreign Exchange Management Act, 1999 to effectively meet the emerging requirements of the rapidly growing Indian economy.

The objective is to achieve operational efficiency in the delivery of foreign exchange facilities to common persons, tourists and businesses, while maintaining appropriate safeguards. The licensing framework for authorised persons issued under FEMA was last reviewed in March 2006. 

*PRIORITY SECTOR LENDING TARGETS FOR PRIMARY URBAN COOPERATIVE BANKS.*

In order to ease the implementation challenges faced by urban cooperative banks, the central bank has decided to extend the phase-in time for achievement of earlier given targets by Mar 31, 2026. A glide path was provided till Mar 31, 2024 to achieve the revised targets, which will ensure a non-disruptive transition.

Further, suitable incentives shall be provided to urban cooperative banks that have met the prescribed targets as on Mar 31, 2023. The priority sector lending for these banks was revised in 2020.  End