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Nifty stumbled on a hawkish hold by the RBI

RBI again clarified it’s a pause not a pivot; depending on actual Fed action, RBI may go for another one/two hikes and hold till at least FY24

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On Thursday (8^th June), the focus of Dalal Street was on the RBI policy meeting (MPC) outcome. As highly expected, RBI holds all its key policy rates anticipating a similar stance from Fed next week (14^th June). RBI kept the benchmark policy repo rate at +6.50%, effective reverse repo rate (SDF) at +6.25%, MSF (Marginal Standing Facility), and Bank rate at +6.75%.

But the overall stance of the EBI may be termed as hawkish hold as RBI Governor Das clarified again the present mode as a ‘pause’, not a ‘pivot’; i.e. RBI may go for further hikes in the coming months depending on the actual domestic inflation trajectory and Fed action. Das also mentioned unexpected rate hikes by RBA (Reserve Bank Of Australia) and BOC (Bank of Canada) this week and expressed caution as India’s core inflation remains substantially above the +4.00% target.

The market was expecting a dovish hold from the RBI this time as India’s headline inflation (CPI) suddenly eased to an 18-month low of +4.7% in April, mainly due to favorable base effects and lower food & fuel prices. The market was expecting an indication of rate cuts by the RBI in late 2023, but RBI didn’t provide any such forward guidance. As a result, the market is now expecting some rate cuts after FY24 rather than late 2023. Subsequently, Nifty stumbled to some extent (around -160 points) soon after the RBI and eventually closed the week around 18563 Friday, down almost -1.15% from the RBI high. Also, mixed cues from Wall Street affected India’s Dalal Street.

Nifty also stumbled from the session high soon after RBI presser/Q&A, as Governor Das clarified that the policy action must be seen as a temporary pause, not a pivot. RBI chooses to hold the repo rate 2^nd time at +6.50% after raising +250 bps in the last FY23 to assess the impact of a cumulative hike on the real economy. RBI repo rate is now at Jan’19 levels after 6^th consecutive hike from May’22 to Apr’23.

On 8^th June, RBI maintained India’s real GDP growth estimate for the FY24 at 6.5% while cutting its inflation (CPI) forecast to 5.1% from 5.2%. India’s headline inflation (CPI) sharply eased to +4.7% in April’23 from +5.7% in May and averaged +6.7% in CY22, but the sequential rate also jumped to +0.5% in April’23 from +0.2%.

India’s core inflation also eased sharply to +5.20% in April’23 from +5.78% in March’23 and an average of +6.00% in 2022.

Full text of RBI statement:

Monetary Policy Statement, 2023-24 Resolution of the Monetary Policy Committee (MPC) June 6-8, 2023

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (June 8, 2023) decided to:

Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 percent. The standing deposit facility (SDF) rate remains unchanged at 6.25 percent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent. The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

The main considerations underlying the decision are set out in the statement below.

Assessment

Global Economy

In the second quarter of 2023, the global economy is sustaining the momentum gained in the preceding quarter despite still elevated though moderating inflation, tighter financial conditions, banking sector stress, and lingering geopolitical conflicts. Sovereign bond yields are trading sideways on expectations of the imminent peaking of the tightening cycle of monetary policy while the US dollar has appreciated. Equity markets have remained range bound since the last MPC meeting. For several emerging market economies (EMEs), weak external demand, elevated debt levels, and geo-economic disintegration amidst tighter external financial conditions pose risks to growth prospects, although capital flows are cautiously returning to them on renewed risk appetite.

Domestic Economy

According to the provisional estimates released by the National Statistical Office (NSO) on May 31, 2023, India’s real gross domestic product (GDP) growth accelerated from 4.5 percent (year-on-year, y-o-y) in Q3:2022-23 to 6.1 percent in Q4, supported by fixed investment and higher net exports. Real GDP growth for 2022-23 was placed at 7.2 percent, higher than the second advance estimate of 7.0 percent.

Domestic economic activity remains resilient in Q1:2023-24 as reflected in high-frequency indicators. Purchasing managers’ indices (PMI) for manufacturing and services indicated sustained expansion, with the manufacturing PMI at a 31-month high in May and services PMI at a 13-year high in April-May. In the services sector, domestic air passenger traffic, e-way bills, toll collections, and diesel consumption exhibited buoyancy in April-May, while railway freight and port traffic registered modest growth.

On the demand side, urban spending remains robust as reflected in indicators such as passenger vehicle sales and domestic air passenger traffic which recorded double-digit growth in April. Rural demand is gradually improving though unevenly – motorcycle sales expanded in April, while tractor sales contracted partly owing to unseasonal rains. Investment activity is picking up as reflected in the healthy expansion in steel consumption and cement output in April. Merchandise exports and non-oil non-gold imports remained in contraction mode in April while services exports sustained a robust expansion.

CPI inflation fell sharply to 4.7 percent in April 2023 from 6.4 percent in February on the back of large favorable base effects, with softening observed across all three major groups. Food group inflation eased, with moderation in cereals, eggs, milk, fruits, meat and fish, spices, and prepared meals inflation and deepening of deflation in edible oils. In the fuel group, inflation in LPG and firewood and chips prices fell, and kerosene prices slipped into deflation. Core inflation (i.e., CPI inflation excluding food and fuel) dipped, driven down by clothing and footwear, household goods and services, health, transport and communication, personal care and effects, and recreation and amusement sub-groups.

The average daily absorption under the LAF increased to ₹1.7 lakh crore during April-May from ₹1.4 lakh crore in February-March. Money supply (M3) expanded by 10.1 percent y-o-y and non-food bank credit by 15.6 percent as on May 19, 2023. India’s foreign exchange reserves were placed at US$ 595.1 billion as on June 2, 2023.

Outlook

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. Milk prices, on the other hand, are likely to remain under pressure due to supply shortfalls and high fodder costs. The forecast of a normal southwest monsoon by the India Meteorological Department (IMD) augurs well for kharif crops; however, the spatial and temporal distribution of the monsoon would need to be closely monitored to assess the prospects for agricultural production.

Crude oil prices have eased but the outlook remains uncertain. According to the early results from the Reserve Bank’s surveys, manufacturing, services, and infrastructure firms polled expect input costs and output prices to harden. A clearer picture will emerge when the final survey results are available. Taking into account these factors and assuming a normal monsoon, CPI inflation is projected at 5.1 percent for 2023-24, with Q1 at 4.6 percent, Q2 at 5.2 percent, Q3 at 5.4 percent and Q4 at 5.2 percent. The risks are evenly balanced.

The higher Rabi crop production in 2022-23, the expected normal monsoon, and the sustained buoyancy in services should support private consumption and overall economic activity in the current year. The government’s thrust on capital expenditure, moderation in commodity prices, and robust credit growth are expected to nurture investment activity. Weak external demand, geo-economic fragmentation, and protracted geopolitical tensions, however, pose risks to the outlook. Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.5 percent with Q1 at 8.0 percent, Q2 at 6.5 percent, Q3 at 6.0 percent, and Q4 at 5.7 percent, with risks evenly balanced.

The MPC took note of the moderation in CPI headline inflation in March-April into the tolerance band, in line with projections, reflecting the combined impact of monetary tightening and supply augmenting measures. Headline inflation is projected to decline in 2023-24 from its level in 2022-23 but would still be above the target, warranting continuous vigil. The progress of the southwest monsoon is critical in this regard.

Domestic economic activity is holding up well. Consumer confidence is improving and businesses remain optimistic about the future. The cumulative rate hike of 250 basis points undertaken by the MPC is transmitting through the economy and its fuller impact should keep inflationary pressures contained in the coming months. Monetary policy would need to be carefully calibrated for alignment of inflation with the target.

Against this backdrop, the MPC decided to keep the policy repo rate unchanged at 6.50 percent. The MPC resolved to continue keeping a close vigil on the evolving inflation and growth outlook. It will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target. The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

All members of the MPC – Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das – unanimously voted to keep the policy repo rate unchanged at 6.50 percent.

Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth. Prof. Jayanth R. Varma expressed reservations on this part of the resolution.

The minutes of the MPC’s meeting will be published on June 22; 2023. The next meeting of the MPC is scheduled during August 8-10, 2023. The next meeting of the MPC is scheduled during August 8-10, 2023.

Full text of RBI Governor Das’s prepared statement: 8^th June’2023

As I make this monetary policy statement, we can derive satisfaction from the fact that the Indian economy and the financial sector stand out as strong and resilient in a world of unprecedented headwinds and swift cross currents. Unlike the previous three tumultuous years, the uncertainty on the horizon appears comparatively less and the path ahead somewhat clearer, but we have to be acutely aware that the geopolitical conflict continues unabated and policy normalization globally is far from complete.

Headline inflation across countries is on a downward trajectory, but is still high and above the targets. Labor markets are tight, and demand is rotating back from goods to services. Hence, central banks across the world remain on high alert and watchful of the evolving conditions, even though many of them have tempered their rate hikes or taken a pause. Financial stability concerns persist in advanced economies, although they appear to have been contained due to resolute actions. Retrenchment in trade, technology, and capital flows caused by geopolitical fault lines and economic fragmentation further complicates the situation.

In these challenging times, the Reserve Bank of India has continued to focus on preserving price and financial stability, while ensuring adequate flow of financial resources to all productive sectors of the economy. As a result, domestic macroeconomic fundamentals are strengthening – economic activity is exhibiting resilience; inflation has moderated; the current account deficit has narrowed; and foreign exchange reserves are comfortable. Fiscal consolidation is also ongoing. The Indian banking system remains stable and resilient, credit growth is robust, and domestic financial markets have evolved in an orderly manner.

Decisions and Deliberations of the Monetary Policy Committee (MPC)

The Monetary Policy Committee (MPC) met on the 6th, 7th, and 8th of June 2023. Based on an assessment of the macroeconomic situation and the outlook, the MPC decided unanimously to keep the policy repo rate unchanged at 6.50 percent. Consequently, the standing deposit facility (SDF) rate remains at 6.25 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent. The MPC also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Let me now explain the MPC’s rationale for these decisions on the policy rate and the stance. The MPC recognized that the pace of global economic activity is expected to decelerate in 2023, dragged down by elevated inflation, tight financial conditions, and geopolitical tensions. The pace of monetary tightening has slowed in recent months, but uncertainty remains on its future trajectory as inflation continues to rule above targets across the world.

In India, consumer price inflation eased during March-April 2023 and moved into the tolerance band, declining from 6.7 percent in 2022-23. Headline inflation, however, is still above the target as per the latest data and is expected to remain so according to our projections for 2023-24. Therefore, close and continued vigil on the evolving inflation outlook is necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain. Real GDP growth in 2022-23, on the other hand, turned out to be stronger than anticipated and is holding up well.

The policy repo rate has been increased by 250 basis points since May 2022 and is still working its way through the system. Its fuller effects will be seen in the coming months. Against this backdrop, the MPC decided to keep the policy repo rate unchanged at 6.50 percent. The MPC will continue to remain vigilant on the evolving inflation and growth outlook. It will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and bring down inflation to the target.

With the policy repo rate at 6.50 percent and full-year projected inflation for 2023-24 at just a little above 5 percent, the real policy rate continues to be positive. The average system liquidity, however, is still in surplus mode and could increase as ₹2,000 banknotes get deposited in the banks. Headline inflation, as noted before, is easing but rules above the target, warranting close monitoring of the evolving price dynamics. Taking all of these factors into account, the MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Assessment of Growth and Inflation

Growth

India’s real gross domestic product (GDP) recorded a growth of 7.2 percent in 2022-23, stronger than the earlier estimate of 7.0 percent. It has surpassed its pre-pandemic level by 10.1 percent. Real GDP growth in Q4 2022-23 accelerated to 6.1 percent (y-o-y) from 4.5 percent in Q3, aided by fixed investment and higher net exports. On the supply side, real gross value added (GVA) accelerated from 4.7 percent in Q3 to 6.5 percent in Q4, driven by a rebound in manufacturing activity which moved into expansion territory after two-quarters of contraction.

Turning to 2023-24, domestic demand conditions remain supportive of growth on the back of improving household consumption and investment activity. Urban demand remains resilient, with indicators such as passenger vehicle sales, domestic air passenger traffic, and credit cards outstanding posting double-digit expansion on a year-on-year basis in April. Rural demand is also on a revival path – motorcycle and three-wheeler sales increased at a robust pace (y-o-y) in April, while tractor sales remained subdued.

Growth in steel consumption, cement output, and production and imports of capital goods suggest continued buoyancy in investment activity. On the back of double-digit growth of 15.6 percent in non-food bank credit, the flow of resources to the commercial sector in 2023-24 (up to May 19, 2023) increased to ₹2.7 lakh crore from ₹1.0 lakh crore during the same period last year.

Fixed investment by manufacturing companies expanded in 2022-23, reversing the contraction seen in 2021-22. Our surveys also point towards higher investment intentions of manufacturing companies for 2023-24. The contraction in merchandise imports outpaced that of merchandise exports in April, resulting in a narrowing of the trade deficit. Coupled with the sustained and strong growth in services exports, the drag from net exports on growth is easing.

On the supply side, the eight core industries' output was expanded by 3.5 percent y-o-y in April 2023 as compared with 3.6 percent in March 2023. The purchasing managers’ index (PMI) for manufacturing exhibited sustained expansion, rising to 58.7 in May, a 31-month high. Available high-frequency indicators suggest that services sector activity has remained on an accelerating trajectory. PMI services maintained strong expansion at 61.2 in May on top of 62.0 in April.

Looking ahead, higher Rabi crop production, expected normal monsoon, continued buoyancy in services, and softening inflation should support household consumption. On the other hand, given the healthy twin balance sheets of banks and corporates, supply chain normalization, and declining uncertainty, conditions are favorable for the capex cycle to gain momentum. Robust government capital expenditure is also expected to nurture investment and manufacturing activity. Consumer and business outlook surveys display continued optimism.

The headwinds from weak external demand, volatility in global financial markets, protracted geopolitical tensions, and intensity of El Nino impact, however, pose risks to the outlook. Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.5 percent with Q1:2023-24 at 8.0 percent; Q2 at 6.5 percent; Q3 at 6.0 percent; and Q4 at 5.7 percent, with risks evenly balanced.

Inflation

Headline CPI inflation has come down during March-April 2023 to 4.7 percent in April, the lowest reading since November 2021. Monetary policy tightening and supply-side measures contributed to this process. The easing of inflation was observed across food, fuel, and core (CPI excluding food and fuel) categories. Food inflation declined to 4.2 percent in April, while core inflation moderated to 5.1 percent. A durable disinflation in the core component would be critical for a sustained alignment of the headline inflation with the target.

Going forward, with the recent Rabi harvest remaining largely immune to adverse weather events, the near-term inflation outlook looks more favorable than at the time of the April MPC meeting. The forecast of a normal southwest monsoon by the India Meteorological Department (IMD) augurs well for the kharif crops. Uncertainties, however, remain on the spatial and temporal distribution of monsoon and the interplay between El Nino and the Indian Ocean Dipole (IOD).

Geopolitical tensions; uncertainties around the monsoon and international commodity prices, especially sugar, rice, and crude oil; and volatility in global financial markets pose upside risks to inflation. Taking into account these factors and assuming a normal monsoon, CPI inflation is projected at 5.1 percent for 2023-24, with Q1 at 4.6 percent, Q2 at 5.2 percent, Q3 at 5.4 percent and Q4 at 5.2 percent. The risks are evenly balanced.

As noted in the April statement, the decision to pause was based on the need to assess the cumulative impact of past monetary policy actions while charting out the future course. Subsequent incoming data suggest that while risks to near-term inflation have moderated somewhat, pressure remains during the second half of the year which needs to be watched and addressed at the appropriate time.

According to our survey, inflation expectations of households for three months to one year ahead horizon have moderated by 60 to 70 basis points since September 2022. This would indicate that anchoring of expectations is underway and that our monetary policy actions are yielding the desired results. This also provides us the space to keep the policy rate unchanged in this meeting of the MPC.

At the same time, given the uncertainties, we need to maintain Arjuna’s eye on the evolving inflation scenario. Let me re-emphasize that headline inflation remains above the target and being within the tolerance band is not enough. Our goal is to achieve the target of 4.0 percent, going forward. As Mahatma Gandhi had said “The ideal must not be lowered.” The continuation of the stance of withdrawal of accommodation should be seen from this perspective.

Liquidity and Financial Market Conditions

Surplus liquidity, as reflected in average daily absorptions under the LAF* at ₹1.7 lakh crore during April-May, was lower than ₹2.9 lakh crore during the full year 2022-23. The shrinkage in surplus liquidity during April-May was, among other things, due to the maturing of TLTROs**. The seasonal expansion in currency in circulation and the build-up of government cash balances during this period also moderated surplus liquidity. Since the third week of May, however, the decline in currency in circulation and pick-up in government spending has expanded the system liquidity. This has got further augmented due to the Reserve Bank’s market operations and the deposit of ₹2,000 banknotes in banks.

The prevalence of surplus liquidity amidst higher recourse to the marginal standing facility (MSF) by some banks suggests skewed liquidity distribution within the banking system***. To address this situation, the Reserve Bank conducted a 14-day variable rate repo (VRR) auction amounting to ₹50,000 crores as part of its main operation on May 19, 2023, similar to two such auctions conducted earlier in February and March 2023.

Reflecting swiftness in its liquidity action, the Reserve Bank conducted a 14-day variable rate reverse repo (VRRR) auction of ₹2.0 lakh crore on June 2; 4-day VRRR of ₹1.0 lakh crore on June 5; 3-day VRRR of ₹75,000 crore on June 6; and 2-day VRRR of ₹75,000 crore on June 7, considering the overall build-up of surplus liquidity.

The response has been cautious in these auctions. Going forward, the Reserve Bank will remain nimble in its liquidity management, while ensuring that adequate resources are available for the productive requirements of the economy. The Reserve Bank will also ensure the orderly completion of the government’s market borrowing program.

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

External Sector

In recent months, the trade deficit has narrowed on the back of a sharper decline in imports vis-à-vis exports. India is making resolute strides to achieve the US$1 trillion merchandise export target by 2030 by focusing on diversification of markets and products; leveraging free trade agreements; strengthening manufacturing capacity and competitiveness by participating in value chains; and through schemes such as Production Linked Incentive (PLI) across sectors.

Service exports and remittances have provided valuable support to India’s external sector viability. During 2022-23, services exports grew faster (27.9 percent) than merchandise exports (6.9 percent). The current account deficit (CAD) is expected to have moderated further in Q4 2022-23 and should remain eminently manageable in 2023-24 also.

On the financing side, foreign portfolio investment (FPI) flows have seen a significant turnaround in 2023-24 led by equity flows. The net FPI inflows stand at US$ 8.4 billion during the current financial year (up to June 6, 2023) as against net outflows in the preceding two years - US$ 14.1 billion in 2021-22 and US$ 5.9 billion in 2022-23. Net FDI flows to India were US$ 28.0 billion in 2022-23 compared to US$ 38.6 billion in the previous year. Preliminary data for April 2023 suggest that FDI flows have improved.

Net inflows under non-resident deposits increased to US$ 8.0 billion during 2022-23 from US$ 3.2 billion in the previous year. The Indian rupee has remained stable since January 2023. Overall, India’s external sector remains resilient as key indicators, such as CAD to GDP, external debt to GDP, and international investment position (IIP) to GDP ratios continue to improve. Foreign exchange reserves stood at a comfortable level of US$ 595.1 billion (as on June 2, 2023). Inclusive of net forward assets, foreign exchange reserves are well above US$ 600 billion.

Additional Measures: I shall now announce certain additional measures.

Borrowing in Call and Notice Money Markets by Scheduled Commercial Banks

The extant regulatory guidelines prescribe prudential limits for outstanding borrowing in Call and Notice Money Markets for Scheduled Commercial Banks (SCBs). To provide greater flexibility for managing their liquidity, it has been decided that SCBs (excluding Small Finance Banks) can set their limits for borrowing in Call and Notice Money Markets within the prescribed prudential limits for inter-bank liabilities.

Widening of the Scope of the Framework for Resolution of Stressed Assets

Compromise settlement is recognized as a resolution mechanism in respect of non-performing assets (NPA) under the Prudential Framework, which is currently applicable to SCBs and selects NBFCs. It is proposed to issue comprehensive guidelines on compromise settlements and technical write-offs which will now be applicable to all regulated entities including co-operative banks. Further, it is also proposed to rationalize the extant prudential norms on the restructuring of borrower accounts affected by natural calamities.

Default Loss Guarantee Arrangement in Digital Lending

The Reserve Bank issued the regulatory framework for Digital Lending in August/September 2022. To further promote responsible innovation and prudent risk management, it has been decided to issue guidelines on Default Loss Guarantee arrangements in Digital Lending. This will further facilitate the orderly development of the digital lending ecosystem and enhance credit penetration in the economy.

Priority Sector Lending (PSL) Targets Primary (Urban) Cooperative Banks (UCBs

The Reserve Bank has undertaken several initiatives in recent years to strengthen the UCB sector as well as to deepen financial inclusion. Such initiatives include the revision of the priority sector lending targets for UCBs in 2020. While revising the PSL targets, a glide path up to March 2024 was provided for a non-disruptive transition to achieve the revised targets. While a number of UCBs have met the required milestones as of March 2023, a need has arisen to ease the implementation challenges faced by other UCBs. It has, therefore, been decided to extend the timelines for achieving the targets by two more years up to March 2026. Further, UCBs which have met the targets as on March 31, 2023, shall be suitably incentivized.

Rationalization of Licensing Framework for Authorised Persons (APs) under Foreign Exchange Management Act (FEMA), 1999

The licensing framework for Authorised Persons (APs) issued under FEMA was last reviewed in March 2006. Keeping in view the developments, including progressive liberalization under FEMA, over the last several years and to effectively meet the emerging requirements of the rapidly growing Indian economy, it has been decided to rationalize and simplify the licensing framework for APs. This is expected to improve the efficiency in the delivery of foreign exchange facilities to various segments of users including common persons, tourists, and businesses.

Expanding the Scope and Reach of e-RUPI Vouchers

At present, purpose-specific e-RUPI digital vouchers are issued by banks. It is now proposed to expand the scope and reach of e-RUPI vouchers by (i) permitting non-bank prepaid payment instruments (PPI) issuers to issue e-RUPI vouchers; (ii) enabling issuance of e-RUPI vouchers on behalf of individuals; and (iii) simplifying the process of issuance, redemption, etc. These measures will make the benefits of e-RUPI digital vouchers accessible to a wider set of users and further deepen the penetration of digital payments in the country.

Streamlining the Bharat Bill Payment System (BBPS) Processes and Membership Criteria

The Bharat Bill Payment System (BBPS) is operational since August 2017. The scope of BBPS was further expanded in December 2022. To further enhance the efficiency of the BBPS system and to encourage greater participation, it is proposed to streamline the process flow of transactions and membership criteria for operating units.

Internationalizing Issuance and Acceptance of RuPay Cards

RuPay Debit and Credit cards issued by banks in India are gaining increased acceptance abroad. It has now been decided to permit the issuance of RuPay Prepaid Forex cards by banks. This will expand the payment options for Indians traveling abroad. Further, RuPay cards will be enabled for issuance in foreign jurisdictions. These measures will expand the reach and acceptance of RuPay cards globally.

Conclusion

We have made good progress in containing inflation, supporting growth, and maintaining financial and external sector stability. Despite three years of global turmoil, India’s growth has bounced back and headline CPI inflation is easing. This confluence of factors gives us the confidence that our policies are on the right track. Nevertheless, we need to move towards our primary target of 4 percent inflation. It is always the last leg of the journey which is the toughest.

I wish to emphasize that we will do whatever is necessary to ensure that long-term inflation expectations remain firmly anchored. The best contribution of monetary policy to the economy’s ability to realize its potential is by ensuring price stability. The Reserve Bank will remain watchful and proactive in dealing with emerging risks to price and financial stability. Let me end by recalling the inspiring words of Mahatma Gandhi “... If we are determined, we shall find the way that leads us to our goal.”

Highlights of RBI MPC Presser and Q&A (RBI Governor Das and Dy. Gov. Patra): 8^th June’2023

·         The first point is that the rate in this meeting of the MPC is a pause. Future action will depend on the evolving situation

·         Secondly, the headline inflation has eased and so also all its components. But there is no room for complacency. The MPC remains resolutely focused on the 4% inflation target in the interest of sustainable growth

·         Thirdly, the Indian economy presents a story of resilience with macroeconomic and financial stability. Prospects for growth are steadily improving and becoming broad-based.

·         Fourthly, the healthy twin balance sheets of banks and corporates also augur well for GDP growth

·         Fifthly, the external sector is eminently viable, as reflected in the current account deficit situation, stability of the Indian rupee, and build-up of foreign exchange reserves

·         Finally, the Reserve Bank’s liquidity management will be nimble and two-sided as per requirement and as demonstrated in our recent actions

·         Till May’23, almost 50% of 2000/- notes (around Rs.1.80T) has come back to banks (out of Rs.3.62T) and provisionally around 85% of it through deposit, not exchange; i.e. as of now, most of 2000/- currency notes returning to the banking system are white money, boosting banking liquidity and also the overall economy

·         RBI will ensure adequate banking/money market liquidity for the productive sector of the economy by two-way LAF operations (injection and absorption) in a careful way so that overnight call money rates stay aligned around the +6.50% policy repo rate

·         There were some liquidity constraints in mid-May as banks were gradually adjusting themselves for 24/7 payment; i.e. transactions after 5:30 PM till mid-night, but now the situation is getting normal as RBI ensured enough system liquidity even after the evening

·         RBI is now only focusing on overnight call money rate and whether it’s aligning with the policy repo rate to judge a balancing liquidity level for the banking system/money market; earlier there was an absolute level of liquidity, (say around Rs.0.60-0.70T surplus liquidity)

·         The regulatory process/discussion is now going on for the newly proposed ECL (Expected Credit Loss for NPA) between RBI and concerned stakeholders including banks and Finance Ministry; thus it would be wrong to presume that the ECL norm will be implemented by 30^th June’23

·         No particular date/time has been decided for the ECL implementation; RBI will provide a sufficient time frame to banks for such new regulation

·         Although RBI does not mention the word ‘pivot’ specifically for the June meeting/MPC, the notion is still valid until RBI changed the same

·         RBI will keep tighter monetary policy as long as inflation returns to +4.0% targets without creating an economic slowdown

·         RBI is concerned about various external vulnerabilities and macro-headwinds despite domestic macro-tailwinds

·         “I would mention only if there was a change. So, it is a pause in this meeting of the MPC and I have not said anything about the pivot, so whatever I said in the last meeting that it is not a pivot, I reiterate that”

·         “I have said in my statement and that is the MPC's view also that our target is 4%. So, our effort will also be to align all our actions to move towards that target and reach the target. It will, therefore, depend on the evolving situation. Given the kind of uncertainties, which persist and I have listed them out in my statement, to say anything other than what I have said”

·         “We endeavor to align the inflation target to 4%, we will move towards 4% and we will be very watchful of the evolving situation and modulate our action suitably – is not desirable”

·         “About a year ago also, we have said that given the high uncertainty, which is prevailing all over not just in India, particularly in the external sector and especially when we are in a tightening cycle, it is not desirable to give any forward guidance because that may create expectations which may not be aligned with our thinking or our action”

·         RBI formulates monetary policy primarily based on domestic macros and evolving outlook, not Fed’s; but RBI do watch carefully the monetary policy action of the Fed, ECB, and other systematically important central banks as their policy actions/stance eventually also affect the domestic financial market, currency rates (FX),  imported inflation and some other aspect of the economy

·         “Our monetary policy actions, as I have been saying time and again, are determined primarily by domestic conditions. We do not look at the action of other central banks to determine our actions. But yes, we do watch what other central banks are doing, because that will have an impact on the financial sector situation, on currency markets and other aspects, but our actions are determined primarily by our domestic factors”

·         Now RBI does not have any defined range of restrictive rate zone, but RBI will be comfortable only when inflation aligns with the target and economic growth returns to pre-COVID potential; although both are in progress, RBI is still not comfortable as the progress of inflation towards the target is still slower than expected, while growth is normalizing litter better; thus RBI still maintaining tightening stance/removal of accommodation

·         RBI Dy. Gov. Patra: “We have described to you what exactly our comfort zone is and that is when inflation aligns with a target and growth returns to potential after the shock, it received from the pandemic. Both are works in progress. There is little better progress on the growth front, inflation is also progressing towards our goal, but not as fast as growth is normalizing. So, we look at both to take the next step”

·         RBI will take appropriate actions to adjust COVID times higher CRR requirement in the future but for the time being, focusing on adjustment of liquidity through both injections and absorption

·         A vital question: There is a big difference between the earlier policy statements and this one in the fact that the earlier policy statement spoke predominantly about the flexibility of the inflation target. Today RBI has been very clear that 4% is the target. It has been a while since we heard that. Does the market now take it that rate cut potentially or a stance change is on the table only when inflation reaches 4%?

·         RBI maintained an inflation tolerance band (4-6%) in stressful times, like COVID and the sudden eruption of the Russia-Ukraine war; but now maintaining a 4% inflation target on a durable basis as the situation has changed and now there is greater clarity; thus RBI will change its stance only when inflation falls to +4.00% on a durable basis

·         “What I have said is that our target and we will endeavor to see that the inflation aligns with the target on a durable basis. Let me clarify. Our effort is to ensure that the actual CPI headline inflation alliance with the targets on a durable basis not a one-off basis at any point of time”

·         “With regard to the band and specific target, the specific and primary target of monetary policy is 4%. During the stressful times of COVID and thereafter when the Ukraine War broke out and the fallout of the Ukraine War, we operated within the band. We use the flexibility, which is available to the Monetary Policy Committee. We operated within that band. We were tolerant of inflation above 4% and our effort and focus was to remain within the target band. Now the situation has changed. There is now greater certainly and I have mentioned it in my opening lines also. The overall path is much clearer than it was earlier. So, we are now targeting 4%, which is our primary target”

·         RBI recently mopped up around Rs.1.5T liquidity from the banking system to ensure overnight call money rate remains around +6.5% repo rate

·         Banks are cautious about liquidity preservation ahead of advance tax payment season

·         Banks should not begin cutting rates on the wrong assumption that RBI may also cut rates in the coming days

·         “It is necessary that any segment of the market does not prematurely assume certain things and then start cutting rates. Whether it is a lending rate or a deposit rate. It is a commercial decision as you know that both deposit rates and lending rates are all deregulated, banks are free to do it. But, if they are doing it on the assumption of a certain action that is likely to be taken by the RBI that would be wrong, and as Deputy Governor clarified our liquidity action also should be seen in the context that our Monetary Policy stance and our policy rate are well-aligned with the interest rates which are prevailing in the market including banks”

·         The latest MSP list shows an average increase across all crops by around 7.5-8.00%, which may also increase the CPI/food inflation projections of RBI by around 10-12 bps, everything being equal

·         The regulatory mechanism of compromise settlement for write-off accounts is being streamlined and UCB (Urban Cooperative Bank) is being included also

·         RBI is looking at inflation aligning with the target (+4.00%), not with the inflation at the target

·         The rate of 6.5% is adjudged to be appropriate at this point and as and when RBI has new information or a new outlook on growth, it will take a new view on the rate

·         RBI is watching the trajectory of core inflation closely; although it fell substantially in April, there are still various uncertainties including an uneven monsoon; RBI is looking for a sustained momentum of core inflation with the headline targets (+4.00%)

·         “There is momentum (for lower core inflation), but we would like to see sustained momentum, not one-off. There are still uncertainties. How the distribution and the timing of the monsoon, the spatial and temporal distribution of monsoon as I mentioned there is also a forecast of an EL Nino. With so many uncertainties, our assessment gave these numbers. We would like to see a sustained momentum toward the alignment of inflation with the headline targets”

Conclusions: RBI is bound to follow Fed in the coming days

Whatever may be the narrative, RBI again paused on 8^th June as the market is now almost sure about a pause by Fed on 14^th June. The RBI may want to maintain the present policy rate differential of 1.50%-2.50% with the Fed depending upon the actual core inflation differential/trajectory. Thus RBI paused, but not pivoted as RBI may want to see actual Fed rate action and SEP on 14^th June and any guidance for the July meeting.

Overall, the U.S. labor market and core inflation trajectory are still hot enough for another Fed hike on 14^th June. But Fed is already indicating a pause in June and not attempting to fight the ratio of 70:30 (hold: rate hike) just before the Fed blackout period started from Friday midnight. Fed never surprised the market with its rate action and as the overall labor market and core inflation is cooling gradually, while the Fed repo rate at +5.25% is now near the mid-zone (+5.50%) of the restrictive zone (5.00-6.00%), Fed may go for a pause on 14^th June, but may also project (June SEP) for another one/two hikes in September and December to manage inflation expectations.

The U.S./Fed’s average underlying core inflation is now around +5.1% (CPI+PCE) and at +5.25% repo rate, the real rate is now positive by around +0.25% and just below the middle range of the Fed’s restrictive zone (5.00-6.00%). The May core inflation data will be released on 13^th June, just a day before Fed’s MPC date. But even if the May core inflation data unexpectedly surge, Fed may not alter its hold decision to shake the market just a day ahead of the MPC date.

As per Taylor’s rule, for the US:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(6.00-2.00) =0+2+4.00=6.00%

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation=6.00% (for 2022)

Looking ahead, Fed may consider a quarterly average of underlying core inflation and outlook and thus may wait for June core inflation data to take any policy action on 20^th September. As Fed is trying to ensure bringing down core inflation towards +2.0% targets without causing an all-out recession (soft/softish landing), Fed may henceforth move only once in a quarter by +25 bps rather than in each meeting (after increasing the rate to restrictive zone-real positive). Thus in its June SEP (dot plots), Fed may forecast another 25/50 bps rate hike for H2CY23 to control market, bond yield, and also inflation expectations.

India’s RBI may have also hiked +0.25% on 8^th June if Fed goes for two consecutive hikes on 3^rd May and 14^th June. If Fed indeed refrains from any rate hike on 14^th June and indicates another one/two +25 bps hike in the rest of 2023, RBI may again go for a +25 bps rate hike at least once in 2023.

India’s core CPI continues to be sticky around +6.00% since Jan’21 and consistently above +4.0% targets even before COVID. Like Fed, RBI is also far behind the inflation curve for a long. Thus RBI wants to ensure a real positive rate, by around +100 bps (restrictive levels) wrt at least average core inflation. RBI continued to tighten to keep interest rate/bond yield differential and also USDINR under control, which will also control imported inflation and manage overall price stability. RBI has to tighten in a calibrated way to bring inflation down by curtailing demand; i.e. slowing down the economy to some extent without causing an all-out recession for a safe and soft landing.

As a Central Bank, RBI’s job is to hike rates well into the restrictive zone to curtail demand, so that it can match with currently constrained supply, resulting in lower inflation. RBI as-well-as Fed has done their jobs almost fully and may hike once/twice more in H2CY23 and a long pause thereof at least till H1CY24 before any plan to cut (if core inflation indeed goes down towards target zones).

In the last financial year (FY23), RBI hiked the +250 bps repo rate and core CPI declined -100 bps from around +7.0% to +6.0% on average; Indian 10Y bond yield also moved up around +100 bps from around +6.0% to 7.0%. At this run rate, if RBI goes for a pause around the 6.50-6.75% repo rate, the core CPI may further fall to around +5.0% by Mar’24 and +4.0% targets by Mar’25.

In India, a higher interest rate may not contain core inflation alone for various reasons, like the government’s indirect control over domestic fuel (petrol & diesel) as per political compulsion. In the last year, global crude oil prices tumbled from around $117 to $67 and India is buying a major portion of Russian oil significantly cheaper than the market price. But the Indian government has not allowed OMCs to reduce retail prices of petrol & diesel apparently to ensure that OMCs remain profitable (after adjusting any previous losses). The government is also collecting huge tax revenue from fossil fuel, which is helping in deficit spending (led by infra spending). The Government may allow OMCs to reduce prices ahead of any major state election and also the early 2024 general election.

In any way, as the government has not passed the benefit of lower crude oil prices into the retail price of petrol & diesel, India’s core inflation remains elevated and sticky around +6.0% for most of 2022 and even early 2023. Also in India, there is significant wage inflation for not only government employees (through DA) but also for private employees, especially corporates; i.e. wage increase is higher than productivity gain. This in turn is also resulting in higher goods and service prices, creating a cycle of higher inflation.

Also, India’s fiscal stimulus; i.e. deficit spending, and grants by the government is creating inflation directly/indirectly (through systematic corruption route). India’s almost 30% population, equivalent to almost the U.S. population may belong to the high middle class/rich category due to good salary income (often more than productivity levels), corruption /unaccounted money, vibrant capital/real estate market, and growing startups and digital ecosystem (You tubers). Most of these categories of the high middle-class population are rich in cash and generally don’t need to borrow heavily for consumption or investment.

Thus despite higher borrowing costs, overall consumer demand in India remains resilient and so core inflation remains elevated and sticky around +6%, which is quite bad for the rest 70% of the population, which belongs to the lower-middle class or under APL/BPL. This 70% of the population also forms a formidable vote bank for any political party and thus any government, which is not able to manage inflation consistently, will be vulnerable in the next election (as seen in the recent Karnataka state election, where ruling party BJP/Modi had suffered formidable loss despite their best campaign effort). The same is true for employment.

As per Taylor’s rule, for India:

Recommended policy rate (I) = A+B+(C+D)*(E-B) =0.50+4+ (1.5+0)*(6-4) =0.50+4+1.5*2=0.50+4+3=7.50%

Here for RBI/India:

A=desired real interest rate=0.50; B= inflation target =4; C= permissible factor from deviation of inflation target=1.5 (6/4); D= permissible factor from deviation of output target from potential=0; E= average core CPI=6 (for CY22)

Thus assuring the estimated average core inflation is around +5.00% in CY23, the restrictive range of the RBI repo rate may be around 6.50-7.50%. If Fed continues to hike +50 bps in H2CY23 (even after June’23 pause) to +5.75% by Dec’23 (in case U.S. core inflation surges more), then RBI also has to hike (under still elevated/sticky core inflation). Thus RBI may like to keep the repo rate at 6.75% in CY23 (depending upon the Fed rate action).

As USD is the reserve/global currency, every major Central Bank has to follow Fed action to maintain bond yield/currency and policy differential (whatever may be the inflation/growth narrative) to control imported inflation. Thus RBI again reminded the market on the 6^th April MPC statement about the real rate of interest of +4.50% in Feb’2019 (when RBI starts the pre-COVID rate cut cycle to support economic growth); in Feb’2019, RBI repo rate was +6.50%, while headline CPI was around +2.00%, but core CPI was around +5.25%. Thus the actual real rate of interest about core CPI was around +2.25% in Feb’2019 against Rajan’ (former RBI Governor) preference of around +1.50% (1.00-2.00%).

Bottom line:

Under Governor Das and Modi admin, RBI may prefer to keep the real rate of interest around 0.50-1.50%; as India’s core CPI is now averaging around +6.00%, RBI may keep the terminal rate between 6.50%-7.50% in the coming days depending upon the actual Fed rate action and domestic core inflation trajectory. As there are a series of state elections in 2023 and also a general election by May’24, RBI may keep the terminal repo rate around 6.50-6.75% if Fed does not go beyond +5.75% and India’s core CPI stays below +6.50%.

Overall, RBI is quite optimistic about India’s GDP growth but is still concerned about elevated sticky core inflation. But RBI is also quite optimistic about maintaining India’s price, financial, and growth stability through its calibrated policy action. As India’s core CPI is still substantially higher than targets, while real GDP growth is almost in line with the potential trend, RBI is still open for another one/two calibrated +25 bps rate hikes. If Fed indeed goes for another t5wo rate hike in H2CY23 for a repo rate of +5.75%, RBI may go for at least another +25 bps rate hike by Dec’23 for a corresponding repo rate of +6.75%.

If Fed goes for only another rate hike in H2CY23 for a terminal repo rate of +5.50%, RBI may continue to hold at +6.50% in FY24. And if Fed does not hike more in H2CY23 and keep the terminal repo rate at present levels of +5.25%, then RBI may even go for a -25 bps rate cut in Apr’24, just ahead of India’s general election in May-June’24 to boost Dalal Street, economy, and risk on/feel-good sentiment.

Technical View: SGX Nifty Future (18671 CMP)

Looking ahead, whatever may be the narrative, technically SGX Nifty Future now has to sustain over 18600 for a further rally to 18750*/18850-19050/19175* in the coming days (Bullish side).

On the flip side, sustaining below 18500-400, SGX Nifty future may again fall to 18300/225-18150/18100*-17925/17775 and 17550*/17300-17000/16800* and 16650* in the coming days (Bear case scenario).

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