During the live updates of the Reserve Bank of India’s monetary policy for 2023, the governor, Shaktikanta Das, gave a speech in which he stated that although inflation is predicted to decrease in the next fiscal year, it may still exceed the target of 4%. He also indicated that additional monetary policy measures were necessary.
The RBI, while maintaining its policy position, hiked the repo rate by 25 bps on Wednesday. Governor Shaktikanta Das said “The global economic outlook does not look as grim now as it was a while ago”. He added “Though inflation still remains well above target in some major economies.”
However, he also announced a whole list of innovative measures that are likely to further modernise the Indian economy in order to deal with the challenges of the future, including digital payments and current account deficit.
Key announcements made
- Repo Rate hike of 25 bps to 6.50% has been considered by the RBI MPC to be appropriate under the current circumstances. The relatively smaller rate cut will allow better study of the impact of measures taken so far.
- FY24 CPI inflation seen at 5.3% while it is pegged at 6.5% for FY23 – core inflation continues to be sticky along with global commodity prices.
- However, lower volatility of the Indian rupee compared to its peers has stabilised the impact on import price pressures.
- GDP growth in July-September 2023 found to be around 6.2% as opposed to the 5.9% earlier – even though the IMF has revised the upward global growth estimates for 2022-23. FY24 read GDP growth projected to be around 6.4%.
- Market hours for government bonds market restored to pre-pandemic time of 9am-5pm.
- Increases in systemic liquidity expected to be moderated by TLTRO, LTRO maturities – it will stay surplus but at a lower level.
- Yield on the 10-year bond rises by 4 bps.
- Real interest rate have thus been nudged into a positive number.
- Current account deficit situation improved with CAD for H1FY23 standing at 2.2% of GDP – net balance of services and remittance to stay in surplus while the overall CAD to moderate in H2FY23.
- RBI to issue guidelines on climate change-related issues such as
- Framework for green deposits
- Disclosures of climate-related financial risks
- Guidance on analysis of climate scenarios and stress-testing.
- Proposal for some foreign travellers and all inbound travellers to India to be able to use UPI for merchant payments while they are in the country – the process will start with allowing travellers from G20 countries at select airports.
- Scope for TReDS platform to be expanded to help improve cash flows of MSMEs.
- Pilot project to be launched in 12 cities wherein machines will vend coins based on QR codes – these machines will be issuing coins against debits to customer’s UPI-linked accounts. Further guidelines will be issued to banks based on the learnings from this pilot project.
Impact on the stock market
Since 10:00 am, the market had been quite uneasy, with the Nifty dropping to around 17,800 and the Sensex getting close to 60,500. But post 10:40, the market has picked up with the Nifty touching 17,858 and the Sensex currently at 60,703 at 11:40 am. The signs are that of renewed confidence in the Indian economy and ability of the RBI to find a way through the inflation.
Impact on debt market
The rate hike is likely to increase the Marginal Cost of Funds-based lending Rates (MCLR) as well well as the External Benchmark Linked Lending Rates (EBLR), thus raising the level of EMIs on your loans. It will increase the cost of money and decrease inflationary pressures in the economy.
All in all, the governor Shaktikanta Das acknowledged the challenges faced by emerging economies in handling inflation and supporting their economies simultaneously. But he projected confidence by quoting Netaji Subhas Chandra Bose, “Never lose your faith in the destiny of India”.
Follow the Angel One blogs on our website for more such exciting content! Open demat account today if do not have one already!