RBI MPC Meeting 2024 Highlights: Deposit-credit divergence may create liquidity management issue, warns Das

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"Previously, we faced a unique liquidity situation where government balances accumulated while spending lagged, leading to tighter liquidity. Currently, liquidity conditions are more balanced, allowing us to maintain the call rate at the center of the corridor. Our primary objective is to keep the call rate aligned with our operating target, reflecting our monetary policy stance, which will continue to be 'Withdrawal of Accommodation.'"

RBI Deputy Governor Swaminathan J notes that while growth in unsecured loans has moderated, it remains robust. The RBI will continue to monitor data closely and respond as needed.

He adds, "In the personal segment, we have only restored the risk weights to pre-COVID levels. During the pandemic, we reduced the risk weight to support the sector. In November 2023, we reverted to the original levels, but we have not made any enhancements beyond that."

RBI Governor Shaktikanta Das states that the central bank’s advice to banks and non-banking financial companies (NBFCs) is to proactively monitor the end use of funds. Das added that the ongoing engagement between the RBI and the government on addressing supply-side issues impacting inflation. He mentioned that the RBI will review public comments on the draft proposal for the Liquidity Coverage Ratio (LCR) before finalizing the guidelines.

Governor Das acknowledges that the divergence between deposit growth and credit expansion could lead to liquidity management issues that banks need to address. He clarified that while he is not directing individuals to choose deposits over market investments, he stressed that the decision on where to invest remains up to the individual.

RBI Governor Shaktikanta Das said that potential liquidity management challenges could be due to the widening gap between deposit growth and credit expansion. He emphasized that not all savings are being diverted into futures and options (F&O) trading. The ‘Early Warning Group’ of regulators has discussed the issue, and the Securities and Exchange Board of India (SEBI) is expected to take appropriate measures to address concerns related to the rising volume of F&O trading.

RBI Deputy Governor says, “We’ve noted that the bulk of FAR interest is concentrated in the 5-10 year segment, which represents 90% of total investments. In contrast, the 30-year segment attracts only 2% of the overall investment stock.”

RBI Governor Shaktikanta Das announced that international agencies such as the IMF and OECD have projected a nearly 3% increase in world trade for this year. Addressing the ongoing discussion around the Liquidity Coverage Ratio (LCR) draft, Das stated that the draft has been released for public feedback. The RBI is currently soliciting inputs from banks and other experts before finalizing the guidelines.

Das emphasised that decisions regarding deposit rates are at the discretion of individual banks and will vary accordingly. He advised banks to effectively use their branch networks to enhance deposit mobilisation.

RBI Governor Shaktikanta Das says it is premature to declare a recession. He stresses that while India has enhanced its resilience to external shocks, it is crucial to wait for more data before drawing conclusions. He notes that India is now significantly more resilient compared to earlier periods.

Governor Das comments that while US unemployment data has sparked some speculation, other economic indicators remain strong. He advises against drawing conclusions based on a single month's data.

Governor Das states that domestic economic growth is resilient, but significant progress is needed to align inflation with the 4% target. He notes that while inflation is moderating, the pace of disinflation remains uneven and slow.

Following RBI Governor Shaktikanta Das's announcement that the repo rate will remain steady at 6.5%—unchanged for the eighth consecutive review since February 2023—the Governor addresses the media in a post-monetary policy press conference.

Dharmakirti Joshi, Chief Economist at CRISIL also adds: Domestically, while the Indian government's budget has been non-inflationary with its focus on investment rather than fiscal expansion, this alone isn't enough for the Reserve Bank of India (RBI) to cut rates immediately. Persistent food inflation remains a significant obstacle. Despite a recent rise in consumer inflation to 5.1% in June due to food price spikes, Joshi anticipates that inflation might ease in July, although this would likely be a result of base effects rather than a fundamental shift.

Joshi expects the RBI to begin rate cuts in October, with two reductions projected for this fiscal year. By then, the impact of the monsoon on food inflation should be clearer, and current favorable conditions in rainfall and sowing offer some optimism for inflation moderation.

Dharmakirti Joshi, Chief Economist at CRISIL, notes that global monetary policy trends are shifting in favor of emerging markets as central banks like the European Central Bank (ECB) and the Bank of England (BOE) have already started rate cuts. With the US Federal Reserve expected to follow suit soon due to easing labor markets, emerging economies are bracing for changes.

Soon, UPI users will gain a new level of convenience with a feature that allows them to authorize another person to handle transactions on their behalf.

Announced by Reserve Bank of India (RBI) Governor Shaktikanta Das on August 8, this new "delegated payments" feature will let primary account holders designate a secondary user to carry out Unified Payments Interface (UPI) transactions within a specified limit. Remarkably, the secondary user won't need their own UPI-linked bank account to execute these transactions.

“This innovation will significantly expand the reach and usage of UPI digital payments,” Das highlighted during the bi-monthly policy announcement.

Additionally, the RBI has raised the UPI payment limit for tax transactions from Rs 1 lakh to Rs 5 lakh, further enhancing the flexibility of digital payments.

Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, remarked, "The RBI's decision to keep rates and its stance unchanged aligns with its clear focus on inflation. While growth remains strong, the MPC has the flexibility to maintain its current policy until there's confirmation of a disinflationary trend. We anticipate a potential shift in policy stance in October, with rate cuts possibly starting in December. The likelihood of simultaneous changes in stance and rates will depend on how both domestic inflation and the global environment evolve."

Samantak Das, Chief Economist and Head – Research and REIS, India, JLL

While central banks in countries like Canada, Europe, and England have opted for rate cuts, the US Federal Reserve has chosen to keep its policy rate unchanged in its latest meeting. Heightened concerns about a possible recession in the US, triggered by a significant increase in the unemployment rate in July, have led to speculations regarding the implementation of emergency rate cuts by the US Central Bank. Nevertheless, future rate cuts in India will primarily be influenced by domestic factors. With food inflation still exhibiting sporadic behaviour, the RBI remains committed to sustaining inflation alignment with their targets on a durable basis. This commitment sets the stage for potential rate cuts in the final quarter of 2024 or early 2025, as the last phase of disinflation unfolds. India’s residential market continues to show robust performance, seen in the Q2 2024 numbers which were the highest ever in terms of quarterly sales, underpinning the strongest H1 performance for the sector. With the sentiment likely to sustain and further strengthen over the upcoming festive season, the current status quo on the repo rate would further support this momentum in 2025.

Shaktikanta Das has called on banks and non-banking finance companies (NBFCs) to closely monitor the deployment of top-up loans, including home equity and gold loans, to ensure they are not used for unproductive or speculative purposes.

This directive follows a significant surge in top-up housing loans. Das highlighted concerns over regulatory compliance, noting that while some institutions are adhering to loan-to-value ratios and risk weight regulations, there are instances where funds may be misallocated.

“Such practices could lead to loan funds being channeled into unproductive areas or speculative activities,” Das warned. He urged banks and NBFCs to reassess their practices and implement necessary measures to prevent misuse.

Following the Reserve Bank of India’s decision to hold interest rates steady, rate-sensitive stocks rode a wild wave of volatility.

In the aftermath of the RBI announcement, the BSE Bankex and Auto Index experienced an initial plunge of nearly 0.6%, only to bounce back and stabilize. The BSE Realty Index also steadied after a jittery start.

Banking stocks felt the shakeup, with Canara Bank, Axis Bank, ICICI Bank, and Kotak Mahindra Bank slipping between 0.5% and 1%. Auto giants like Maruti Suzuki, TVS Motors, Bajaj Auto, and M&M saw similar drops.

In the realty sector, the scene was more upbeat. Prestige Estate zoomed up by 2.4%, Sunteck Realty soared 1.7%, and Oberoi Realty edged up 0.5%. However, Sobha took a dip of 1.3%, while Godrej Properties and Macrotech Developers each fell by 0.9%.

Economists anticipate that the MPC may shift to a neutral stance in October and potentially begin reducing rates by December, provided food inflation moderates to a level within the RBI's comfort zone. In the interim, borrowers will face elevated interest rates.

Inflation eased to a 12-month low of 4.75% in July 2024, but food inflation remains high at approximately 8.7%.

In comparison, during 2021 and 2022, market rates were at their lowest around 6.5% when the repo rate was 4%, resulting in a 2.5% spread. Currently, benchmark lending rates are above 8%.

Deepak Agrawal, CIO - Debt, Kotak Mahindra AMC on the RBI MPC announcement:

Amid global financial volatility and varied actions from central banks, the RBI has chosen to maintain its status quo on rates, sticking with a “withdrawal of accommodation stance” by a 4:2 vote. Growth and inflation targets remain unchanged. The RBI has opted not to take immediate action on liquidity, continuing with its Variable Rate Reverse Repo (VRRR) auctions to absorb excess liquidity. Market expectations are now looking towards a potential shift in stance and monetary easing in the second half of FY 2025. Despite this, market reaction has been subdued, with the 10-year yield anticipated to trade between 6.75% and 6.95%.

Members Ashima Goyal and Jayanth Varma voted to reduce the repo rate by 25 basis points and to shift the policy stance to neutral.

Reserve Bank of India (RBI) Governor Shaktikanta Das has urged banks to adopt more innovative strategies to attract deposits. Speaking during his monetary policy review on August 8, Das highlighted the growing appeal of alternative investment options for retail investors, which has made it increasingly challenging for banks to secure deposits. He cautioned that this trend could lead to potential liquidity issues for banks and stressed the need for innovation in deposit collection methods to address these challenges.

Indian bond yields edged up by 2 basis points during the RBI’s August monetary policy announcement by Governor Shaktikanta Das on Thursday. At 10:21 am, the yield on the 10-year benchmark 7.10% 2034 bond rose to 6.8802%, up from 6.8600% at the open and 6.8632% at the close of the previous session.

"Inflation is moderating, but the progress is slow and uneven. India’s inflation and growth trajectory is moving in a balanced manner, but it is crucial to remain vigilant to ensure that inflation aligns with the target."

The Nifty Bank indices experienced a slight decline, falling by approximately half a percent, following the Reserve Bank of India's decision to hold the repo rate steady at 6.5% for the ninth consecutive time.

By 10:14 am, the Nifty Bank index was down 0.49% to 49,891.75. The Nifty PSU Bank index dropped 0.45% to 6,892.10, while the Nifty Private Bank index fell 0.37% to 24,915.80.

The RBI has proposed establishing a public repository for digital lending apps to combat issues arising from unauthorized platforms. Regulated entities will be required to report their digital lending apps to the RBI to ensure better oversight. Additionally, the transaction limit for UPI-based tax payments has been increased from Rs 1 lakh to Rs 5 lakh per transaction.

The Reserve Bank of India (RBI) implemented two-way Liquidity Adjustment Facility (LAF) operations in June and July to align overnight rates with the repo rate. During the same period, net Foreign Direct Investment (FDI) inflows saw a significant increase, doubling in the April to June 2024 quarter compared to the previous year. Additionally, India’s foreign exchange reserves reached a record high of $675 billion as of August 2, 2024.

The overall financial sector is healthy and stable. Banks and NBFCs will be advised to take remedial action. An unprecedented outage impacted industries globally, making it necessary for banks and financial institutions to build frameworks to maintain operational resilience.

Das says that the financial system remains resilient and continues to gain strength. India has built robust buffers to withstand global volatility spillovers. However, banks are finding it challenging to raise deposits as alternative investment modes are drawing savings away from traditional bank deposits.

Governor Das states that the MPC may overlook high food inflation if it is temporary but cannot ignore persistently high food inflation due to its potential spillover effects. He emphasizes that the public primarily perceives inflation through the lens of food prices.

RBI has adjusted its CPI inflation forecast for Q2FY25 to 4.4%, up from the previous estimate of 3.8%. The Q3FY25 forecast has also been slightly revised to 4.7% from 4.6%, while the Q4FY25 forecast has been lowered to 4.3% from 4.5%. For Q1FY26, CPI inflation is projected at 4.4%.

Governor Shaktikanta Das stresses that the RBI cannot and should not become complacent despite a significant drop in core inflation, highlighting that food inflation pressures remain a concern.

The Reserve Bank of India (RBI) has maintained its FY25 CPI inflation forecast at 4.5%. High food price momentum is expected to have persisted through July. The GDP growth targets for Q2FY25, Q3FY25, and Q4FY25 remain unchanged at 7.2%, 7.3%, and 7.2% respectively. The real GDP projection for Q1FY26 is set at 7.2%. However, the GDP growth target for Q1FY25 has been revised to 7.1% from the earlier estimate of 7.3%. Overall, the FY25 real GDP growth projection remains unchanged at 7.2%.

RBI Governor Shaktikanta Das highlighted that the Services PMI indicates robust expansion in the services sector. He also noted that fixed investment activity remains buoyant, and services exports have recorded impressive double-digit growth.

RBI Governor Shaktikanta Das notes that inflation is receding gradually across economies, while medium-term global growth faces significant challenges. Despite this, domestic economic activity remains resilient, with manufacturing gaining traction due to improving demand.

RBI Governor Shaktikanta Das states that domestic growth is resilient, supported by steady urban consumption. The MPC determined that it is crucial for monetary policy to remain consistent while closely monitoring inflation. The committee emphasized maintaining a primary focus on inflation to support sustained economic growth.

RBI Governor Shaktikanta Das has confirmed that the Marginal Standing Facility (MSF) and the Standard Deposit Facility (SDF) rates remain unchanged at 6.75% and 6.25%, respectively. Das noted a significant alignment between market expectations and the MPC's policy stance. He also highlighted that while headline inflation is expected to moderate due to a favorable base effect, this trend may reverse in Q3.

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) voted by a 4-2 majority to keep policy rates unchanged. The committee also decided to maintain its 'Withdrawal of Accommodation' stance

RBI Governor Shaktikanta Das announced today that the repo rate remains steady at 6.5%, maintaining the same level for the eighth consecutive review since February 2023. The current pause is the second-longest in the past 25 years.

RBI Governor Shaktikanta Das's address on key rate decision begins. Repo rate and stance announcement soon.

In addition to announcing the MPC's decision on the repo rate and other policy rates, RBI Governor Shaktikanta Das will provide insights into the current domestic and global economic landscape.

Following the policy announcement, Das will hold a press conference at 12:00 pm on Thursday, which will be streamed live on the RBI’s X handle.

On Wednesday, the RBI shared details on X for accessing the live broadcast of the MPC meeting. Monetary Policy Statement by Governor @DasShaktikanta on August 8, 2024, at 10:00 am. Watch live here: YouTube Live Stream.

The repo rate, which is the central bank’s rate for short-term loans to banks, remains steady at 6.5 percent—a level unchanged since April 2023. As the Monetary Policy Committee (MPC) wraps up its current review, it seems unlikely that any change will be made.

According to a Moneycontrol poll, most economists and bankers expect the central bank to keep the repo rate unchanged. If this prediction holds true, it will mark the ninth consecutive meeting without any rate adjustments.

On June 30, RBI Monetary Policy Committee member Shashanka Bhide highlighted that the Indian economy is on track for a period of stable high growth, despite facing significant risks. Bhide noted that rising incomes are likely to boost domestic demand, and recent high levels of investment are expected to enhance production capacity. As a result, domestic economic activity is anticipated to maintain its momentum.

“In terms of growth momentum and inflation trends, the Indian economy is set for a potentially stable high growth phase,” Bhide said.

If RBI maintains status quo on policy rates, will it result in the second-longest pause in the last 25 years.

Ashima Goyal, an external member of the RBI's Monetary Policy Committee (MPC), was asked whether keeping rates high for too long could impact consumption. She responded, “Yes, due to our high interest elasticity of aggregate demand—driven by a young population that relies on credit—monetary policy has a significant impact on demand. Fiscal measures are more effective in addressing supply-side inflation. The post-pandemic macroeconomic policies worked well because fiscal actions supported by monetary policy kept the real repo rate low. This coordination needs to continue, especially since growth projections for FY25 are already expected to be below those of FY24.”

By 2015, over thirty countries had adopted inflation targeting, and the RBI followed suit in 2016. Unlike the 1960s, when the goal was to achieve absolute price stability (which could include price level declines), modern policies focus on a more moderate inflation target. Developed countries now aim for around 2% inflation, while India’s target is set at 4%.

Milton Friedman discussed why central banks shouldn’t target the natural rate of unemployment or interest to achieve price stability. He argued that it’s impossible to accurately determine the "natural rate" of these variables. Today, the term "neutral rate of interest" is used instead of "natural rate."

Mahendra Kumar Jajoo, CIO – Fixed Income at Mirae Asset Investment Managers, predicts that the MPC will likely keep interest rates unchanged. With the Federal Reserve signaling potential rate cuts in its next meeting, expectations for lower rates are rising. A decrease in interest rates could enhance returns on mutual funds, making them an attractive option for fixed deposit investors. Jajoo suggests that FD investors consult with their advisors and consider switching to debt mutual funds, depending on their risk profile.

"MPC is expected to maintain status quo on rates. Expectations for rate cuts are increasing with Fed signalling likely easing in next meeting. Any fall in interest acts may provide scope for higher returns in mutual funds. FD investors who receive a fixed rate return may consider switching to appropriate debt mutual fund after consulting with respective advisors and keeping in mind the risk profile.”

In 1967, Milton Friedman suggested that while controlling the price level was important, it would be better to target it indirectly through money growth. However, when a money growth rule was tested in the early 1980s, it failed badly. Using nominal GNP growth as a target was also problematic due to its operational issues.

As a result, the Federal Reserve and other central banks shifted to directly targeting inflation. Initially, this was done implicitly but later became more explicit. The term "Inflation Targeting" might be misleading; "Direct Inflation Targeting" would be a more accurate description.

Inflation targeting is based on Milton Friedman’s natural rate hypothesis from the 1960s. Friedman argued that a central bank can't control real factors like unemployment or real interest rates over the long term, so it should focus on what it can control. He believed that while cutting interest rates might boost growth in the short term, it won't last. Instead, a central bank should target only nominal variables, like inflation, because that’s the only thing it can consistently manage over time.

“I prefer not to provide forward guidance that might mislead market players and stakeholders,” Das stated.

He elaborated on the current policy stance, explaining, “Our target is 4%, but we are still hovering around 5%. While inflation is moderating, the pace is slow. For a quicker alignment with the target, monetary policy would need to be significantly tighter.”

On July 11, RBI Governor Shaktikanta Das cautioned that discussing an interest rate cut is premature given the current economic uncertainties and persistent inflation.

In an interview with CNBC-TV18, Das remarked, “The global and domestic economic environments are highly uncertain right now. With CPI headline inflation hovering around 5%—and expected to remain close to that mark—it’s too early to consider an interest rate cut.”

Money market experts anticipate that the central bank may persist in draining temporary liquidity from the banking system, despite its current large surplus.

A fund manager noted that the RBI has various tools at its disposal to manage excess liquidity, given its 'Withdrawal of Accommodation' stance. However, with the CD ratio and banks actively seeking deposits, a permanent liquidity drain seems unlikely. Instead, the RBI is expected to continue removing temporary liquidity.

At present, the banking system is estimated to have a surplus of approximately Rs 2.79 lakh crore.

Experts expect the central bank to maintain its GDP growth forecasts in the upcoming August monetary policy. However, some economists predict that the real GDP growth could be adjusted upward to 7.5%.

In its June policy statement, the central bank revised its real GDP growth forecast for FY 2024-25 to 7.2%, up from the previous estimate of 7%.

RBI Governor Shaktikanta Das, speaking at the Bombay Chamber of Commerce and Industry, expressed confidence that India's growth will reach 7.2% in the current financial year.

The RBI's current policy stance reflects the views of its Monetary Policy Committee (MPC), which is now focused on withdrawing accommodation. An accommodative stance suggests a potential rate cut, while a neutral stance implies that rate adjustments could go in either direction.

In Moneycontrol’s monetary policy poll, most experts anticipate that the RBI will maintain its 'Withdrawal of Accommodation' stance. However, four bankers predict a shift to a neutral stance.

Economists warn that changing the monetary policy stance might send mixed signals to the market, especially as the central bank's top priority remains combating inflation.

Abhishek Bisen, Head of Fixed Income at Kotak Mahindra AMC, reported that June's inflation data revealed a rise to 5.08%, up from 4.75% in May 2024. This increase was driven by higher food inflation, which surged to 9.40% YoY. Despite this, core inflation remained relatively low at 3.10%. The inflation spike was largely due to a sharp rise in perishable goods prices, such as vegetables, which increased by approximately 29% in June compared to 27% in May. Price pressures also continue in pulses and cereals. However, with the base effect coming into play, inflation for July/August 2024 is expected to moderate, aligning with the RBI’s Q2FY25 projection of 3.8%. Inflation may, however, rise again from Q3FY25.

When asked about the impact of maintaining 'too-high-rates-for-too-long' on the banking system, Goyal noted that borrower stress could dampen aggregate demand. She acknowledged that high interest rates increase the risk of delinquency in sectors with high leverage or rapid growth, such as retail loans. However, with risk-based lending practices, adequate capital coverage, and tightened prudential regulations, lending institutions are expected to stay resilient.

In the RBI Minutes, RBI MPC Member Ashima Goyal highlighted that spreads in India are elevated, with average loan rates remaining in double digits. While risk-based pricing is necessary, she emphasized that cutting repo rates could prevent retail interest rates from reaching unsustainable levels.

Ashima Goyal, an external member of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), warned in an exclusive interview with Moneycontrol that keeping interest rates high for too long could stifle consumption and, ultimately, economic growth.

“Our interest elasticity of aggregate demand is high due to a young population that relies on credit for consumption. This means monetary policy has a significant impact on demand, whereas fiscal measures are more effective at tackling supply-side inflation,” Goyal explained.

On July 31, the US Federal Reserve maintained short-term interest rates but signalled that inflation is approaching its target, suggesting the possibility of future rate cuts. Chair Jerome Powell mentioned that while no decisions have been made for upcoming meetings, a rate cut could occur as early as September if economic data indicates easing inflation.

Meanwhile, the Bank of Japan (BOJ) took a significant step towards normalising its monetary policy by raising its benchmark interest rate and announcing plans to halve bond purchases. The BOJ increased its policy rate to approximately 0.25 percent, up from the previous range of 0 to 0.1 percent.

Some economists foresee a potential surge in real GDP growth to an impressive 7.5%. "Projections for FY25's real GDP growth are likely to climb to 7.5%," predicted Madhavankutty G., Group Chief Economist at Manappuram Finance.

In its June monetary policy review, the Reserve Bank of India (RBI) raised its real GDP growth forecast for FY25 to 7.2%, up from the previous 7%.

Addressing the Bombay Chamber of Commerce and Industry, RBI Governor Shaktikanta Das exuded confidence, affirming that India's growth would hit 7.2% this fiscal year. He highlighted that should this forecast materialize, it would mark the fourth consecutive year of growth exceeding 7%.

Recent data highlights the inflationary pressure. India's Consumer Price Index (CPI) inflation climbed to a four-month high of 5.08% in June 2024, driven by a surge in food prices, which spiked to 9.36% from May's 8.69%. With July's CPI figures set to be released on August 12, the urgency for the MPC to address inflation is evident.

Economists broadly anticipate that the RBI will keep the repo rate steady at 6.5%, a level it has upheld for the last eight reviews since February 2023. This rate, a key instrument for managing inflation, is likely to remain unchanged until at least December 2024 due to rising inflation, particularly in the volatile food sector.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is gearing up to announce its decision on August 8, and the consensus among experts is clear: the policy repo rate is expected to stay put. According to a Moneycontrol poll of 18 economists, bankers, and fund managers, the RBI is likely to maintain its current stance due to persistently high inflation.

Most experts predict the central bank will continue its 'Withdrawal of Accommodation' policy. However, a few bankers believe a shift to a neutral stance could be on the horizon.

As the RBI gears up for its crucial announcement, the delicate balance between sustaining economic growth and curbing inflation is at the forefront of its mandate. RBI Governor Shaktikanta Das will unveil the bi-monthly monetary policy statement at 10 am.

Stay tuned for the latest updates and key insights!