The monetary policy committee (MPC) of Reserve Bank of India (RBI) on Thursday 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%.
Announcing the decision of the MPC after its three-day deliberations, RBI governor Shaktikanta Das says, "Under the current monetary policy setting, inflation and growth are evolving in a balanced manner and overall macroeconomic conditions are stable. Growth remains resilient, inflation has been trending downward and we have made progress in achieving price stability, but we have more distance to cover. The progress towards our goal of price stability has been uneven due to large and persistent supply side shocks, especially in food items. We, therefore, need to remain vigilant to ensure that inflation moves sustainably towards the target while supporting growth. This approach would be net positive for sustained high growth."
According to the RBI governor, inflation is receding grudgingly across major economies, with varying outlooks for growth and inflation across countries. "Monetary policy is showing signs of divergence across jurisdictions. Several central banks are cautiously moving towards policy pivots, including forward guidance and rate cuts. At the same time, there has also been tightening by a few central banks."
Headline inflation, after remaining steady at 4.8% during April and May 2024, increased to 5.1% in June 2024, primarily driven by the food component which remains stubborn. Core inflation (CPI— consumer price index—excluding food and fuel) moderated, while the fuel group remained in deflation.
Mr Das says, "The expected moderation in headline inflation during the second quarter of FY24-25 on account of favourable base effects is likely to reverse in the third quarter. Domestic growth, however, is holding up well on the back of steady urban consumption and improving rural consumption, coupled with strong investment demand."
Amidst this confluence of factors, the RBI governor says, the MPC judged that it is important for monetary policy to stay the course while maintaining a close vigil on the inflation trajectory and the risks thereof. "Resilient and steady growth in GDP enables monetary policy to focus unambiguously on inflation. It must continue to be disinflationary and resolute in its commitment to aligning inflation to the target of 4.0% on a durable basis. Accordingly, the MPC decided to keep the policy repo rate unchanged at 6.50% in this meeting."
"The commitment of monetary policy to ensure price stability would strengthen the foundations for a sustained period of high growth. Hence, the MPC reiterated the need to continue with the disinflationary stance of withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth," he added.
The RBI governor also pointed out four proactive identifying issues related to potential risks and challenges to the financial sector. "First, it is observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth. As a result, banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand. This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues. Banks may, therefore, focus more on the mobilisation of household financial savings through innovative products and service offerings and by leveraging fully on their vast branch network."
"Second, it is observed that the sectors in which pre-emptive regulatory measures were announced by RBI in November last year have shown moderation in credit growth. However, certain segments of personal loans continue to witness high growth. Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards, as may be required, as well as post-sanction monitoring of such loans," Mr Das says.
He mentioned home equity loans, or top-up housing loans as they are called in India, have been growing at a brisk pace and similar to other collateralised loans like gold loans, banks and non-banking finance companies (NBFCs) are offering top-up housing loans.
"It is noticed that the regulatory prescriptions relating to the loan to value (LTV) ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities. I repeat certain entities. Such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review such practices and take remedial action," the RBI governor says.
Mr Das also mentioned a recent global outage in Microsoft Windows systems. He says, "The outage demonstrated how a minor technical change, if it goes haywire, can wreak havoc on a global scale. It also showed the fastgrowing dependence on big-techs and third-party technology solution providers."
"In this background, it is necessary that banks and financial institutions build appropriate risk management frameworks in their IT, cyber Security and third-party outsourcing arrangements to maintain operational resilience. RBI has time and again emphasised the importance of robust business continuity plans (BCP) to deal with such incidents," Mr Das added.
According to Dharmakirti Joshi, chief economist of CRISIL, with a lower fiscal impulse and investment-focused spending, the Budget was clearly non-inflationary, but that is not enough for RBI to initiate rate cuts yet. "Other domestic factors, particularly inflation, still dictate a cautious wait-and-watch approach. Food inflation is a hurdle and without a durable decline in it, headline inflation cannot be tamed to 4% on a sustained basis. A pick-up in food inflation in June dragged consumer inflation to 5.1%. To boot, the growth momentum remains strong. Inflation should decline in July, but the RBI will overlook it because that will be a purely high-base effect."
"We expect RBI to begin cutting rates in October at the earliest and have penciled in two rate cuts this fiscal. By then, there will be clarity on food inflation as the monsoon would have played out. Good progress on rains and sowing so far offers hope," Mr Joshi says.
Here are the additional measures announced by the RBI governor...
Public Repository of Digital Lending Apps
RBI has taken several measures for the orderly development of the digital lending ecosystem in India. As a further measure in this direction and to address the problems arising from unauthorised digital lending apps (DLAs), the Reserve Bank proposes to create a public repository of DLAs deployed by its regulated entities. The regulated entities (REs) will report and update information about their DLAs in this repository. This measure will help the consumers to identify the unauthorised lending apps.
Frequency of Reporting of Credit Information to Credit Information Companies
The availability of accurate credit information is vital for both lenders and borrowers. At present, lenders are required to report credit information to credit information companies (CICs) on a monthly basis or at such shorter intervals as may be agreed between the lenders and the CICs. It is proposed to increase the frequency of reporting of credit information to a fortnightly basis or at shorter intervals.
Consequently, borrowers will benefit from faster updation of their credit information, especially when they repay their loans. The lenders, on their part, will be able to make better risk assessment of borrowers.
Enhancing Transaction Limit for Tax Payments through UPI
Currently, the transaction limit for UPI is Rs1 lakh except for certain category of payments which have higher transaction limits. It has now been decided to enhance the limit for tax payments through UPI from Rs1 lakh to Rs5 lakh per transaction. This will further ease tax payments by consumers through UPI.
Introduction of 'Delegated Payments' through UPI
It is proposed to introduce a facility of 'delegated payments' in UPI. This would enable an individual (primary user) to allow another individual (secondary user) to make UPI transactions up to a limit from the primary user's bank account without the need for the secondary user to have a separate bank account linked to UPI. This will further deepen the reach and usage of digital payments.
Continuous Clearing of Cheques At present, cheque clearing through cheque truncation system (CTS) operates in a batch processing mode and has a clearing cycle of up to two working days. It is proposed to reduce the clearing cycle by introducing continuous clearing with 'on-realisation-settlement' in CTS. This means that cheques will be cleared within a few hours on the day of presentation. This will speed up cheque payments and benefit both the payer and the payee.
