RBI'S PAUSE ,NOT PIVOT .
Reserve Bank of India in its Monetary Policy announced on April 6th 2023 after increasing its repo rate (Repurchase option rate) continuously six times in 11 months decided to pause now with the existing 6.5%. Repo rate refers to the rate at which Reserve Bank of India lends money to Commercial banks to meet any shortage of funds. Hike in repo rate is taken as a major monetary instrument to control inflation. When there is a shortage of funds commercial banks borrow money from RBI against securities like treasury bills or Government bonds which is settled according to the repo rate. An increase in repo rate raise the costs of borrowing by both public and private sectors under different schemes and projects like home loan, EMI etc. On the contrary a decrease in repo rate not only reduces the cost of borrowing but also provides greater liquidity. Similarly the Marginal Standing Facility Rate (MSF) allows the commercial banks to avail funds overnight from RBI and the MSF rate existing in India currently is 6.75. This facility was introduced to help commercial banks when they require money urgently and when inter- bank liquidity is completely drained. The maximum amount that can be availed under the MSF is a percentage of banks NDTL or net demand and time liabilities. Banks can utilize their Statutory Liquidity Ratio (SLR)to take loans under MSF. SLR or Statutory Liquidity Ratio refers to the minimum liquidity percentage of deposits required to be maintained by commercial banks in the form of liquid assets, cash,gold,government securities etc.On the other hand Cash Reserve Ratio (CRR) refers to a portion of commercial banks total deposits that needs to be maintained at the central bank of the country (RBI).Whereas the Standing Deposit facility (SDF) is a collateral free liquidity absorption mechanism implemented by RBI for purpose of transferring liquidity out of the commercial banking sector and to the RBI.As per current data SDF rate is 6.25 in India. In short major policy instruments available with RBI for meeting macroeconomic objectives of growth, employment and stability in prices and balance of payments are repo rate,MSF,SLR,SDF,CRR along with selective credit control measures and open market operations.
According to the RBI Governor the repo rate hikes has been paused only for this MPC meeting and if the situation so warrants MPC will not hesitate to take appropriate action. RBI wants to carefully evaluate consequences of the cumulative 250 basis point increase in the repo rate since May 2022,the fastest pace of hike in the past decade. Considering the standard deposit facility (SDF) rate increase there has been actually an effective rate of increase to 290 basis points. This 290 bps increase has translated to a monetary policy transmission by way of increase in the overnight call rates from daily average of 3.32% in March 2022 to 6.52% in March 2023.
Monetary policy Committee (MPC) decision to pause repo rate hikes at the existing level of 6.5 seems to be reasonable in the context of recessionary clouds looming across global economies. RBI'S assumption of estimated average retail inflation of 5.2% is not expected to breach the 6% target.The FY 2023-24 growth forecast is 6.6% assuming that crude oil prices pruned around $85/barel.However recent OPEC plus countries decision to drastically reduce crude output is likely to change crude prices to higher levels. According to World Trade Organisation (WTO) the war in Ukraine and stubborn inflation around the world are expected to hold back growth in global trade this year, restraining the pace of economic recovery even as the world emerges from the height of the pandemic. The volume of world merchandise trade is expected to increase only 1.7% this year compared to 2.7% growth in 2022.WTO economists forecast that global economic growth will slow down to 2.4% this year compared to 3.0% in 2022 and 5.9% in 2021.Inflation is biggest culprit for sluggish growth of foreign trade.Eventhough food and energy prices have declined from their sharply elevated level after invasion of Ukraine they continue to remain relatively high.
RBI's growth projection was based on factors like robust rabi production which improves the prospects for rural economy, steady growth in contact intensive services along with Government's focus on capital expenditure and infrastructure development.RBI's study also revealed the optimism shared by both businesses and consumers about the future outlook of the domestic economy. Considering these factors real GDP growth for 2023-24 is projected at 6.5% with the break up of 7.8% for Q1, 6.2% for Q2, 6.1% for Q3 and 5.9% for Q4 with risks evenly balanced. The World Bank has marginally lowered India's GDP growth projection to 6.3% in fiscal year 2023-24 as against Asian Development Bank's (ADB) projection of 6.4%.Most agencies expect GDP growth around 6% in the current fiscal year. On the other hand assuming crude oil price at $ 85 per barrel and a normal monsoon the retail inflation (CPI) is projected at 5.2 % for 2023-24 with quarterly break up of 5.1% for Q1,5.4% for Q2,5.4% for Q3 and 5.2% for Q4 and risks evenly balanced.Quite significantly RBI projected 6.6% growth.It is a consolation that as per World Bank data India received the record highest level of $102 billion by way of inward remittances for 2022.
RBI has resorted to a hawkish pause in the context of both inflation and growth seems to be moderating in FY 2023-24. Captains of industry and trade welcomed the decision to pause repo rate increase. Globally the banking system in advanced economies apparently cracked under the Contagion of banking crisis in Central Banks ranging from the Federal Reserve (Fed) to Swiss National Bank, European Central Bank and Bank of England. Developments in the global economy and financial system forced RBI to pause temporarily the momentum of repo rate increase. The underlying commitment to ensure that retail inflation is progressively aligned to the mandated target of 4%.Development in the global financial system particularly the banking sector turmoil and the volatility and uncertainty both have triggered and weighed heavily on policy makers decision to watch and wait.Quite significantly India's banking and non banking financial service sectors remain healthy and economic activity remain resilient. RBI policy makers now judiciously chosen to subordinate their concerns over inflation to ensure that the growth momentum is not undermined. In fact uncertainty about global headwinds including banking crisis,geopolitical tensions, crude prices and domestically food inflation ,core inflation and volatility in crude prices may impact retail inflation. Hence monetary policy should continue to focus more on stability in prices and external balance. Growth objective should be largely entrusted to fiscal policy and Government. However the RBI's "Pause" is quite unlikely to continue.
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