RBI maintains status quo on repo rates in April 2023 policy

6 Apr 2023 , 12:12 PM

Between the February monetary policy and the April monetary policy, there have been some distinct shifts. GDP estimates for FY23 stayed robust at 7%, even as the fall in inflation has not been in tandem with the rate hikes. However, the big event was the global banking crisis in March 2023. It began with the fall of SVB and Signature Bank and, under pressure, even Credit Suisse had to sell out to UBS. This crisis is relevant because in all these cases, the depletion in the bond portfolio due to higher rates was a key trigger, if not the cause. 

The question was whether the RBI would also, like the US Federal Reserve, treat monetary policy and the banking crisis as discrete variables. Or would it choose to chart its own path based on the thinking most suited to the Indian context. The RBI opted for the latter. Contrary to popular expectations of a 25 bps rate hikes, the RBI MPC decided to maintain status quo on repo rates. The RBI had the option to either run with the hares or hunt with the hounds. It has found a middle path. Here is how the middle path looks like.

Key takeaways from the April 2023 monetary policy

Even as the Fed spoke of keeping banking crisis and monetary policy discrete, RBI has concluded it is not that simple. 

• RBI maintained the repo rates at 6.50% in the April 2023 policy statement. Repo rates are already up 250 bps from the lows of May 2022 and a full 135 bps higher than the pre-COVID repo rate of 5.15%. RBI stance is focused on withdrawal of accommodation.

   

• Here is what happened to the pegged rates in the economy. The SDF rate, being a derived rate, stayed pegged at 6.25%; exactly 25 basis points below repo rate. Bank rate and MSF rates stay at 6.75%, pegged 25 bps above repo rates. 

   

• In the course of the address, the RBI governor underlined that this was a temporary pause and not indicative of the future trajectory of rates. RBI governor also reminded that including 40 bps SDF hike, the total rate hike in 11 months stands at 290 bps.

   

• With FY23 now completed, the RBI projection of FY24 GDP growth stands at 6.5% while the projected inflation for FY24 stands at 5.2%. CPI inflation has been sticky above the 6% tolerance, so the RBI hint is that rate hikes may not yet be done with.

   

• MPC members voted unanimously to hold repo rates at 6.50% and voted 5:1 for withdrawal of accommodation. Only Jayanth Varma voted against the decision on withdrawal of accommodation considering the current growth challenges.

   

• What does that mean for the terminal repo rate. With the repo rates already at 6.5%, markets were expecting the inflation to go above 7% eventually. However, the pause in April 2023 has come as a surprise. It would now depend largely on the inflation levels. 

In a sense, the current decision to hold rates at 6.5% looks more like a compromise formula. There has been pressure from the trade and industry bodies since cost of funds has gone up sharply and most companies are facing a squeeze on net margins and on solvency ratios. The banking crisis globally, gives RBI the opportunity to experiment with status quo on rates and assess the outcome. However, it looks unlikely that the hawkishness has changed.

Inflation for FY24 at 5.2%; GDP growth at 6.5%

Inflation estimate for FY24 has been lowered by 10 bps from 5.3% to 5.2%. What is still encouraging is that this assumes crude at $95/bbl. In reality, crude has been hovering around $80-85/bbl. With a global slowdown on the horizon, it looks unlikely that the crude prices could really go much higher. That should help inflation remain subdued. Core inflation could stay elevated at above 6% due to the lag impact of input costs. The break-up of 5.2% retail inflation for FY24 is as under: Q1FY24 at 5.1%, Q2FY24 at 5.4%, Q3FY24 at 5.4% and Q4FY24 at 5.2%. One positive feature has been the current account deficit (CAD), which came in sharply lower at 2.2% of GDP in Q3FY23. That would ensure that the extent of imported inflation would not only be reduced but also neutralized by services exports.

What about GDP growth? Here, the RBI has pegged GDP growth for FY24 from 6.5%, which is broadly in line with the first advance estimates of MOSPI and the recent World Bank estimates. That would mean that for FY23 and FY24, India would be the fastest growing large economy, but more on that later. The growth projections are largely predicated on a better than expected Rabi crop this season, which would give a big boost to rural incomes and rural consumption. The moderation in commodity prices, therefore, would also give a boost to manufacturing output. GDP growth projection for FY24 has been upped by 10 basis points to 6.5%. Here is the break-up of FY24 GDP growth of 6.5% quarter-wise. GDP growth is projected at: Q1FY24 at 7.8%, Q2FY24 at 6.2%, Q3FY24 at 6.1% and Q4FY24 at 5.9%. 

To sum it up, the RBI has upped its GDP growth estimate by 10 bps and lowered its FY24 inflation estimate by 10 bps. However, these are marginal changes. From a policy perspective, the RBI would continue to be worried about inflation. That means, the current decision to hold rates at 6.5% may be just a pause, rather than a change in monetary stance.

Key policy shifts announced by RBI, outside MPC ambit

RBI monetary policy once again went beyond monetary numbers to signal a shift at a policy level. Check out these key announcements.

• RBI has announced developing an onshore non-deliverable derivatives market in currencies. This would not only offer a source of revenue and an added product offering by Indian banks, but also prevent the export of currency trading abroad. 

   

• Development of centralized web portal to search for unclaimed deposits. This will enable search across multiple banks for unclaimed deposits based on user inputs. Recently, RBI reported Rs35,000 crore of unclaimed deposits.

   

• Improving the grievance redressal mechanism with respect to the functioning of credit information companies in the light of rising complaints. It will also set deadlines for ingestion of data supplied by financial institutions.

   

• UPI may be expanded beyond bank deposit accounts, RuPay credit cards and wallets to existing pre-sanctioned credit lines. This can reduce the cost in a big way.

Where does monetary policy go from here?

The RBI governor has used the relatively strong data flows to experiment with a pause in rate hikes. For the RBI, it is not just about the global banking crisis, but the stress in domestic markets. Indian companies are facing the double whammy of falling net profit margins and weakening solvency ratios. For now, it does seem to be a pause, but if there are no negative implications on inflation, the RBI may choose to persist with these repo rates.

We have to assess more data points like full year GDP, inflation numbers at the CPI level and the IIP growth. The minutes of the MPC meeting on 20th April 2023, will provide deeper insights into the thinking of the individual MPC members and how the consensus was arrived at. The next monetary policy from 06th June to 08th June will be critical as the food inflation data would be more suggestive by then. For the RBI the choice would still be whether to run with the hares or hunt with the hounds.