The one thing that you must not miss in any of the monetary policy announcements is the concluding remarks of the governor in his speech. If his previous speeches in April and May spoke about an economy in flux, it is more action oriented in June. He sums up by quoting Mahatma Gandhi, “If we want to overtake the storm that is about to burst, we must make the boldest move to sail full steam ahead”.
In a sense, this captured the gist of the June policy statement. The reason the June policy became special was that there was an interim May policy inserted in between as the RBI went after inflation all guns blazing. After hiking repo rates by 40 bps in May 2022 to 4.40%, it has hiked repo rates by another 50 bps to 4.90%. However, as SBI had pointed in its pre-policy remarks, the RBI has abstained from hiking CRR any further.
To be fair, even after the 90 bps hike in May and June combined, the repo rate is still 25 bps lower than the pre-COVID normal. Remember, RBI had cut rates by 115 bps to boost the economy amidst the COVID pandemic. But first, the highlights of the policy statement.
RBI hikes repo rates, skips CRR hikes in June
The RBI has largely taken a pragmatic approach to the current situation of rising inflation and faltering growth.
• The policy repo rate has been raised by 50 basis points from 4.40% to 4.90% but still 25 bps short of the pre-COVID levels of 5.15%.
• Consequently, the standing deposit facility (SDF) highlighted in the April policy stands increased to 4.65%, since it is pegged 25 basis points below the repo rate.
• The bank rate and the marginal standing facility (MSF) rate, pegged 25 bps above the repo rates, go up to 5.15% post the June repo rate hike.
• Contrary to street expectations, the RBI opted to give CRR hikes a miss and the CRR stays at 4.5% to avoid constraining bank credit beyond a point.
• Inflation expectations for FY23 were raised by 100 bps to 6.7%. This is on top of the 120 bps upscaling from 4.5% to 5.7% in the previous MPC meet.
• GDP forecast for FY23 has been maintained at 7.2%, although this is based on an assumption of a normal monsoon and Kharif output in 2022.
• The MPC voted to remain focused on withdrawal of accommodation with a view to keep inflation in the range of 4% with a range leeway of 200 bps either ways
• All the 6 members voted unanimously to hike the repo rates by 50 basis points. The vote on the stance of the policy was also unanimous.
If one were to assess the bounce in the Nifty and Sensex post the policy announcement, it was largely a celebration of the fact that the RBI abstained from another CRR hike.
MPC hikes inflation forecast by 100 bps to 6.7%
The increase in the inflation forecast for FY23 by 100 bps from 5.7% to 6.7% was on expected lines after CPI inflation came in at 7.79% in April 2022 and WPI inflation at 15.08%. The RBI has also added a caveat that this inflation was assuming the crude basket at around $105/bbl as well as normal monsoon and Kharif output. While this could be a risk, the RBI has also not factored the anti-inflationary impact of monetary policy, so it would be offset.
The RBI has noted that the global turmoil and the high commodity prices would be a major risk to inflation levels. Also, the rabi output had been lower than expected due to the heat wave, which had led to the food inflation spiking rapidly. RBI has pegged full year FY23 inflation at 6.7%. This has been broken up as under: Q1FY23 at 7.5%, Q2FY23 at 7.4%, Q3FY23 at 6.2% and Q4FY23 at 5.8%.
Chart Source: RBI Statement
The above chart shows inflation expectations trending higher and GDP expectations trending lower.
RBI holds growth outlook for FY23 at 7.2%
Despite the higher inflation trajectory, the RBI has not made any changes to the GDP growth projections at 7.2%. There are reasons why the RBI is optimistic. Most of the high frequency indicators like GST collections, PMI data and e-way bills are hinting at a strong domestic recovery. In addition, RBI expects a turnaround in rural consumption once the normal southwest monsoons result in another bumper Kharif output. RBI expects the economic activity to also get a fillip from the recent boost to global trade.
However, the RBI still thinks it is too early to hike the growth forecasts. Remember, at 7.2%, the RBI forecast is still 30 bps below the downsized World Bank forecast for India. RBI has maintain full year FY23 GDP growth target at 7.2%. This has been broken up as under: Q1FY23 at 16.2%, Q2FY23 at 6.2%, Q3FY23 at 4.1% and Q4FY23 at 4.0%. Due to the base effect, there is going to be a lot of front-loading of growth in the first quarter.
Why the RBI abstained from a CRR hike in June 2022
Contrary to street expectations, the RBI opted to keep the CRR at 4.5%. In May, it had hiked CRR by 50 bps to amplify the rate hike. At that point, the CRR hike had soaked up liquidity to the tune of Rs87,000 crore. However, in the June policy, the RBI abstained from any CRR hike, in tune with the demand from the banks not to hike CRR as it imposed a much sharper cost on them.
However, overall system liquidity is still in surplus, as per the RBI. In May 2022, the average daily absorption at Rs5.50 trillion was lower than the April 2022 daily average of Rs7.40 trillion. RBI has held on to the view that the CRR hike in May 2022 was more of a broad signal about the phased withdrawal of accommodation. It believes that the current VRRRs are good enough to soak up excess liquidity.
Additional regulatory and development measures announced
In the last few years, the RBI has used the policy statement to also provide additional measures on the regulatory front. Here are some key announcements.
• RBI hikes limits on individual home loans by UCBs and RCBs by over 100% in sync with rising home prices across India.
• RBI has raised the recurring e-payments limit from Rs5,000 to Rs15,000, to simplify transactions like subscriptions.
• Credit cards will be permitted to be linked to UPI (unified payment interface), starting with RuPay credit cards.
• RBI to put in place margins for non-centrally cleared derivatives (NCCD) to improve resilience of the OTC market and offset counterparty risk.