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RBI monetary policy highlights: Repo rate hiked for fifth time in a row by 35 bps, key points from RBI's policy decision

Dec 7, 2022

India's Reserve Bank of India on Wednesday hiked the repo rate for the fifth time in a row, by 35 bps to 6.25% with immediate effect. The central bank had last raised the key benchmark rate by 50 basis points on September 30. With this, the repo rate has been raised by 225 bps since April 2022.

"MPC was of the view that further caliberated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects...", said RBI governor Shaktikanta Das and maintained that the RBI would continue the withdrawal of accommodation.

RBI also lowered its GDP growth forecast for FY23 to 6.8 per cent from 7 per cent earlier but retained the consumer price inflation forecast for FY23 at 6.7 per cent.

RBI governor Shaktikanta Das said risks to inflation and core inflation emerged as the two big worry for the monetary policy committee currently.

Here are the key highlights from the RBI policy:

  • MPC voted to remain focused on withdrawal of accommodation
  • Inflation expected to be above 4 percent in the next 12 months
  • GDP growth forecast for FY23 lowered to 6.8 percent from 7 percent
  • CPI inflation forecast for FY23 retained at 6.7 percent
  • Standing Deposit Facility rate, Marginal Standing Facility rate also increased by 35 basis points each to 6% and 6.5%.
  • Indian rupee has appreciated by 3.2 percent during April-October in real terms, even as major currencies have depreciated. Rupee should be allowed to find its level.
  • Slowing external demand weighing on India’s merchandise exports. Size of India's forex reserves is comfortable and has increased; forex reserves stand at $561.2 billion as on December 2.
  • FDI inflows rose to $22.7 billion in April to October 2022 from $21.3 billion in the corresponding period last year.
  • CPI inflation forecast for Oct-Dec 2022 raised to 6.6% from 6.5%
  • January-March 2023 to 5.9% from 5.8%
  • April-June 2023 at 5.0%
  • July-September 2023 at 5.4%
  • Growth forecast: GDP growth forecast for Jan-Mar 2023 lowered to 4.2%
  • GDP growth forecast for Oct-Dec 2022 lowered to 4.4%

Indian economy outlook: The outlook is supported by good progress of rabi sowing, sustained urban demand, improving rural demand, a pick-up in manufacturing, rebound in services and robust credit expansion.

Main risk: The main risk is that core inflation (CPI excluding food and fuel) remains sticky and elevated. Overall, the CPI price momentum remains high. Risks from adverse weather events add to uncertainty in the outlook.

Global commodity prices, including crude oil, have undergone some downward correction, but uncertainty continues to surround the near-term outlook in view of the prolonging geo-political hostilities. The outlook for the US dollar and hence imported inflation also remains uncertain. Moreover, the resurgence in domestic services sector activity could also lead to price increases, especially as firms pass on input costs. Taking into account these factors and assuming an average crude oil price (Indian basket) of US$ 100 per barrel, headline inflation is projected at 6.7 per cent in 2022-2023.

What do these growth and inflation scenarios convey?
GDP growth in India remains resilient and inflation is expected to moderate; but the battle against inflation is not over. Pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain.

External sector: The growth of services exports, mainly contributed by software, business and travel services remained robust at 29.1 per cent in April-October 2022. Remittances are scaling new heights and the outlook is optimistic with pick-up in activity in the middle east. According to the latest update of the World Bank, India’s remittances are estimated to grow by around 12 per cent to US$ 100 billion in 2022 from US$ 89.4 billion in 2021. In Q1:2022-23, remittances to India rose by 22.6 per cent year-on-year.

On the financing side, net foreign direct investment (FDI) flows have remained robust and rose to $22.7 billion during April-October 2022 from $21.3 billion in the corresponding period last year. Foreign portfolio flows have resumed in recent months and were positive at US$ 11.8 billion during July to 5th December 2022, led by equity flows. As a result of the measures announced by the RBI on July 6, 2022 to enhance forex inflows, new external commercial borrowing (ECB) agreements have been concluded for $ 8.6 billion. This includes $5.1 billion which exceed the earlier threshold of US$ 750 million under the automatic route. The size of forex reserves is comfortable and has also increased. It has gone up from US$ 524.5 billion on October 21, 2022 to US$ 561.2 billion as on December 2, 2022 covering around nine months of projected imports for 2022-23.

Enhancing the Mandates of Unified Payments Interface (UPI)
The capabilities in UPI will be further enhanced by introducing single-block-and-multiple-debits functionality. This facility will enable a customer to block funds in his/her account for specific purposes, which can be debited whenever needed. This will significantly enhance the ease of making payments for investments in securities including through the Retail Direct platform as well as e-commerce transactions.

Expanding the Scope of Bharat Bill Payment System (BBPS)
At present, it handles recurring bill payments for merchants and utilities and does not cater to nonrecurring bills. It also does not cater to bill payments or collections such as payment of fees for professional services, education fees, tax payments, rent collections, etc. for individuals even if those are recurring in nature. Therefore, the scope of BBPS is being enhanced to include all categories of payments and collections, both recurring and non-recurring, and for all category of billers (businesses and individuals). This will make the BBPS platform accessible to a wider set of individuals and businesses who can benefit from the transparent payments experience, faster access to funds and improved efficiency.

[The Times of India]

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