The monetary policy committee (MPC) of Reserve Bank of India (RBI), for the 10th consecutive time, decided to maintain the status quo on the repo rate, the central bank's rate for short-term loans to banks, unchanged at 6.5%. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the bank rate at 6.75%. Further, the MPC decided unanimously to change the stance to 'neutral' and to remain unambiguously focused on a durable alignment of inflation with the target while supporting growth.

 

Announcing the decision of the MPC after its three-day deliberations, RBI governor Shaktikanta Das says, "The monetary policy action reflects the MPC's assessment that, at the current juncture, it would be appropriate to have greater flexibility and optionality to act in sync with the evolving conditions and the outlook. We stand unambiguously committed to ensuring durable alignment of inflation with the target while supporting growth."

 

While expressing concerns over stress buildup in a few unsecured loan segments like loans for consumption purposes, microfinance loans and credit card outstandings, the RBI governor says the central bank is closely monitoring the incoming information and will take measures as may be considered necessary. "Banks and non-banking finance companies (NBFCs), on their part, need to carefully assess their individual exposures in these areas, both in terms of size and quality. Their underwriting standards and post-sanction monitoring have to be robust. Continued attention also needs to be given to potential risks from inoperative deposit accounts, cybersecurity landscape and mule accounts."

 

During the meeting, Mr Das says the MPC noted that the macroeconomic parameters of inflation and growth are currently well balanced. "Headline inflation is on a downward trajectory, though its pace has been slow and uneven. Going forward, the moderation in headline inflation is expected to reverse in September and is likely to remain elevated in the near term due to adverse base effects, among other factors. Food inflation pressures could see some easing later in this financial year on the back of strong kharif sowing, adequate buffer stocks and good soil moisture conditions which are conducive for rabi sowing. Adverse weather events continue to pose contingent risks to food inflation. Core inflation, on the other hand, appears to have bottomed out. The fuel component of CPI remains in contraction."

 

Domestic growth has sustained its momentum, with private consumption and investment growing in tandem, the RBI governor says, adding, "Resilient growth gives us the space to focus on inflation so as to ensure its durable descent to the 4 per cent target. In these circumstances, the MPC decided to remain watchful of the evolving inflation outlook in the coming months. Keeping in view the prevailing inflation and growth conditions and the outlook, the MPC considered it appropriate to change the stance to 'neutral' and to remain unambiguously focused on a durable alignment of inflation with the target while supporting growth."

 

Mr Das also says the flexible inflation targeting (FIT) framework set up in 2016 has served well over the years and has proved its mettle. "Monetary policy in India was able to respond to the economic slowdown decisively and swiftly in the wake of the COVID-19 pandemic and again pre-emptively during the build-up of inflationary pressures after the war began in Ukraine in early 2022. The prevailing well-balanced growth-inflation dynamics is a testimony to the success of the FIT framework," he added.

 

According to RBI, the real gross domestic product (GDP) grew by 6.7% in Q1FY24-25, led by a revival in private consumption and improvement in investment. The share of investment in GDP reached its highest since FY12-13. On the supply side, gross value added (GVA) expanded by 6.8%, surpassing GDP growth, aided by strong industrial and services sector activities.

RBI projected real GDP growth for FY24-25 at 7.2%, with Q2 at 7.0%, Q3 at 7.4% and Q4 at 7.4%. real GDP growth for Q1FY25-26 is projected at 7.3%.

As anticipated, Mr Das, the RBI governor, says headline consumer price index (CPI) inflation softened significantly in July and August, with base effect playing a major role in July. "The CPI print for September is expected to see a big jump due to unfavourable base effects and pick up in food price momentum, caused by the lingering effects of a shortfall in the production of onion, potato and chana dal (gram) in FY23-24, among other factors."

He says, "Unexpected weather events and worsening of geopolitical conflicts constitute major upside risks to inflation. International crude oil prices have become volatile in October."

RBI projected CPI inflation for FY24-25 at 4.5%, with Q2 at 4.1%, Q3 at 4.8% and Q4 at 4.2%.

"The prevailing and expected inflation-growth balance has created congenial conditions for a change in monetary policy stance to neutral. Even as there is greater confidence in navigating the last mile of disinflation, significant risks to inflation from adverse weather events,  accentuating geopolitical conflicts and the very recent increase in certain commodity prices continue to stare at us. The adverse impact of these risks cannot be underestimated," Mr Das says.

According to the RBI governor, NBFCs have registered impressive growth over the last few years, which has resulted in more credit flow to the remote and underserved segments, bolstering financial inclusion. However, he pointed out three concerns of RBI over credit flows by NBFCs.

"First, it is observed that some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks commensurate with the scale and complexity of their portfolio. An imprudent' growth at any cost' approach would be counterproductive for their own health," he says.

Secondly, Mr Das says that driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs - including microfinance institutions (MFIs) and housing finance companies (HFCs) - are chasing excessive returns on their equity. "While such pursuits are in the domain of the boards and managements of NBFCs, concerns arise when the interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties. These practices are sometimes further accentuated by what appears to be a 'push effect', as business targets drive retail credit growth rather than its actual demand. The consequent high-cost and high indebtedness could pose financial stability risks if not addressed by these NBFCs."

"Thirdly, the NBFCs may review their prevailing compensation practices, variable pay and incentive structures, some of which appear to be purely target-driven in certain NBFCs. Such practices may result in adverse work culture and poor customer service," Mr Das says.

According to RBI, it is crucial that NBFCs, including MFIs and HFCs, follow sustainable business goals, a 'compliance first' culture, a strong risk management framework, a strict adherence to fair practices code and a sincere approach to customer grievances.

"The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary. Self-correction by the NBFCs would, however, be the desired option," Mr Das warned.

Commenting on RBI's decision to maintain the repo rate at 6.5%, Anuj Puri, chairman of Anarock group, says it will help the housing market to maintain momentum during the festive season. "From the point of view of homebuyers, the relatively affordable home loan interest rate regime will continue at a critical time for the Indian housing market - the festive season - amid rising housing prices and tapered sales."

Data from Anarock shows that during Q3FY23-24, average housing prices rose by a cumulative 23% in the top-7 cities even as average prices in these markets collectively rose to about Rs8,390/sqft (square feet) by Q3FY23-24-end, from around Rs6,800/sqft in Q3FY22-23.

"The unchanged home loan rates are much-needed demand support in the ongoing festive quarter. We are expecting faster sales momentum in Q4 2024 when compared to the preceding quarter. This year's festive quarter may see similar demand to that seen in this period a year ago, if not higher. Over 1.27 lakh units were sold across the top 7 cities back in Q4 2023. Unchanged interest rates will play an important role in achieving and maintaining this momentum," Mr Puri says.

Here are the additional measures announced by the RBI governor...

Introduction of Beneficiary Account Name Look-up Facility
At present, unified payment interface (UPI) and immediate payment service (IMPS) provide a facility for the remitter of funds to verify the name of the receiver (beneficiary) before executing a payment transaction. It is now proposed to introduce such a facility for the real time gross settlement system (RTGS) and the national electronic funds transfer (NEFT) system. This facility will enable the remitter to verify the name of the account-holder before effecting funds transfer to him/her through RTGS or NEFT. This will also reduce the possibility of wrong credits and fraud.

UPI - Enhancement of Limits
RBI says that UPI has transformed India's financial landscape by making digital payments accessible and inclusive through continuous innovation and adaptation. To further encourage wider adoption of UPI and make it more inclusive, it has been decided to enhance the per-transaction limit in UPI123Pay from Rs5,000 to Rs10,000 and increase the UPI Lite wallet limit from Rs2,000 to Rs5,000 and per-transaction limit from Rs500 to Rs1,000.

Responsible Lending Conduct - Levy of Foreclosure Charges or Pre-payment Penalties on Loans
RBI has taken several measures over the years to safeguard consumer's interests. As part of these measures, Banks and NBFCs are not permitted to levy foreclosure charges or pre-payment penalties on any floating rate term loan sanctioned to individual borrowers for purposes other than business. It is now proposed that the scope of these guidelines be broadened to include loans to micro and small enterprises (MSEs). A draft circular in this regard shall be issued for public consultation.

Discussion Paper on Capital Raising Avenues for Primary (Urban) Co-operative Banks
RBI says it has undertaken several initiatives in recent years to strengthen the urban co-operative banking (UCB) sector. Such initiatives include the issuance of regulatory guidelines in 2022 for the issue and regulation of share capital and securities by UCBs. To provide more flexibility and avenues for UCBs to raise capital, it says a discussion paper on capital-raising avenues for UCBs will be issued for feedback and suggestions from stakeholders.

Creation of Reserve Bank Climate Risk Information System (RB-CRIS)
Climate change is emerging as a significant risk to the financial system the world over. This makes it necessary for regulated entities to undertake robust climate risk assessment, which is sometimes hindered by gaps in high-quality climate-related data. To bridge these data gaps, RBI proposes to create a data repository, namely, the Reserve Bank - Climate Risk Information System (RB-CRIS).