On 8^th December 2023, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), has announced its Monetary Policy Statement. MPC has paused interest rate hikes and kept inflation its priority.  Let us see the MPC stands in detail now

Monetary Policy Statement, December, 2023

MPC has unanimously kept the policy interest rate (i.e. Repo Rate) unchanged at 6.50 percent.

As a result the Standing Deposit Facility (SDF) rate remains at 6.25 percent and the Marginal Standing Facility to remain at 6.75 percent. Five (5) out of Six (6) Members of MPC are remain focused on withdrawal of accommodative stance to maintain the inflation in line with its target while promoting growth.

MPC on GDP Estimates

MPC stated that the resilience of domestic activity is evident. In Q2:2023 24, the real gross domestic product (GDP) increased by 7. 6 per cent year on year, thanks to strong investment and government consumption, which offset the drag of net external demand. In Q2, the supply side’s gross value added GVA increased by 7. 4 per cent, thanks to robust manufacturing and construction activities.

It also said that a sustained strengthening of manufacturing activity, buoyant construction, and gradual recovery in rural areas are anticipated to enhance the outlook of household consumption. Strong balance sheets in banks and corporates, supply chain normalization, improved business optimism, fiscal consolidation, forex reserves and a rise in public as well private capex should be favorable factors for investment growth in the future. As exports improve, the external demand drag is expected to be modest.

In terms of risks, MPC statement said that, the headwinds from the geopolitical turmoil, geo-economic disintegration, and volatility of international financial markets may pose a threat for the outlook.

Source: MPC statements, Reserve Bank of India

MPC has estimated that the Real GDP growth for 2023-24 would be at 7.0 percent with Q3 at 6.5 percent and Q4 at 6.0 percent. For Q12024-25, the Real GDP growth is estimated at 6.7 percent; Q2 at 6.5 percent and Q3 at 6.4 Percent. (See Chart 1 above which depicts these) MPC said the risks are balanced equally.

MPC on Inflation

MPC stated that since last MPC meeting (held on October 6^th, 2023), CPI headline inflation has decreased by 2 percentage points to 4.9 percent in October, 2023. This decrease is due to sharp correction in prices of some vegetables, decline in prices of fuel and reduction in core inflation (i.e. CPI inflation minus/excluding food & Fuel prices).

MPC took into consideration that adequate buffer stocks for cereals, slowdown in international food prices along with a Governments pro-active supply side initiatives may keep food inflation on check. The prices of Crude oil may remain volatile, for their inflation projection.  

Source: MPC statements, Reserve Bank of India

Based on this consideration, with other considerations, the CPI inflation is estimated at 5.4 percent for 2023-24 – Q3 at 5.6 percent and Q4 at 5.2 percent. MPC stated that assuming a normal monsoon next year, CPI inflation for Q1 2024-25 is estimated at 5.2 percent; Q2 at 4.0 percent; and Q3 at 4.7 percent (See Chart 2 above). MPC also stated that the risks are evenly balanced.

MPC Stance

MPC stated that the disinflation trajectory should be maintained. It stated that it will carefully and closely watch on any indications that the pressures on food prices are spreading as this could undermine the progress made so far in easing the core inflation.

In terms of Growth, MPC stated, that the stronger investment demand along with consume and business optimism would boost domestic economic activity and ease supply bottlenecks.

MPC stated that it has to continue its disinflation trajectory to guarantee the anchoring of inflation expectations and fuller transmission. MPC stated that aligning inflation to the target remains its priority. MPC also decided to remain focused on withdrawal of accommodative stance to maintain the inflation in line with its target while promoting growth.

It also announced additionally that the UPI cap has increased from Rs. 1 lakh to Rs. 5 lakh. RBI Stated that “To encourage the use of UPI for medical and educational services, it is proposed to enhance the limit for payments to hospitals and educational institutions from ₹1 lakh to ₹5 lakh per transaction.”

Key Takeaways and My Perspective

This means for the next two months, the lending rate for home buyers, car buyers, EMI loans, and for new loan takers, will remain the same. This will also encourage the real estate owners to start their launch of new ventures. Increasing the UPI limit for education and hospitals is very welcome move from RBI.

Deflationary Trajectory has to be maintained and should be the main aim for RBI at least till Inflation reaches its target of 4 percent. RBI has to be vigilant on core inflation too. It has to be noted that RBI has not changed its stance to neutral. This is for the fifth time in a row RBI has paused the key interest rate hike.

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