The Reserve Bank of India (RBI) has maintained the key interest rate for the third consecutive meeting during the bi-monthly MPC session held on Thursday. The central bank decided to keep the benchmark repurchase rate at 6.50%, which is the rate at which RBI lends to other banks.

"As we approach India's 77th Independence Day, I am pleased to observe that despite recent significant shocks to the global economy, the Indian economy remains resilient and stable. Our economy has continued to grow at a respectable pace, securing its position as the fifth largest economy globally and contributing about 15% to the worldwide growth. We have also made considerable strides in controlling inflation. Our banking sector is the healthiest it has been in over a decade, with historically high capital levels, decreasing non-performing assets, and increasing profitability. Corporate balance sheets are robust, showing lower leverage, improved debt servicing capabilities, and strong profitability. Our external sector benefits from a reduced current account deficit and ample capital inflows, bolstering our foreign exchange reserves against external shocks. Overall, India's solid macroeconomic fundamentals have established the groundwork for sustainable growth.

In the current juncture, our focus remains on maintaining macro-financial stability while propelling our growth trajectory forward. India is uniquely positioned to capitalize on global economic shifts stemming from geopolitical realignments and technological innovations. With its substantial domestic demand, untapped resources, and demographic advantages, India has the potential to emerge as the new global growth engine.

The Monetary Policy Committee (MPC) convened on the 8th, 9th, and 10th of August 2023. Following comprehensive deliberations on all pertinent factors, the committee unanimously decided to maintain the policy repo rate at 6.50%. Consequently, the standing deposit facility (SDF) rate remains at 6.25%, the marginal standing facility (MSF) rate and the Bank Rate stand at 6.75%. By a majority vote of 5 out of 6 members, the MPC also resolved to remain focused on gradually withdrawing accommodation to ensure inflation aligns with the target while simultaneously supporting growth.

Now, let me elucidate the MPC's rationale behind these decisions on the policy rate and stance. After touching a low of 4.3% in May 2023, headline inflation increased in June and is expected to surge during July and August, primarily due to elevated vegetable prices. Although the impact of the vegetable price shock could be transitory, we must monitor closely the potential effects of El Niño weather patterns and global food prices, particularly given the uneven distribution of the monsoon this year. These developments necessitate heightened vigilance over the evolving inflation trajectory. The cumulative 250 basis points rate hike undertaken by the MPC is permeating the economy. Nonetheless, despite weak external demand, domestic economic activity remains resilient and is likely to sustain its momentum. In light of these complex factors, the MPC has chosen to maintain a watchful stance and assess the emerging situation. Consequently, the policy repo rate remains unchanged at 6.50%, with the readiness to act if the situation warrants. The MPC remains steadfast in its commitment to aligning inflation with the 4% target and anchoring inflation expectations.

Furthermore, with monetary transmission ongoing and headline inflation persisting above the 4% target, the MPC's focus remains on unwinding accommodation to ensure progressive alignment of inflation with the target while still supporting growth. During the accommodative phase of monetary policy from February 2019 to March 2022, the weighted average domestic term deposit rate (WADTDR) for fresh deposits in scheduled commercial banks and the weighted average lending rate (WALR) for fresh loans declined by 259 and 232 basis points, respectively, in response to the 250 basis points repo rate cut. In the recent tightening phase from May 2022 to June 2023, the repo rate increased by 250 basis points, fully offsetting the easing phase reduction. However, the rise in WADTDR for fresh deposits and WALR for fresh loans at 231 and 169 basis points, respectively, lags behind the decline witnessed in these rates during the accommodative phase.

Assessment of Growth and Inflation on the Global Stage

The global economy continues to grapple with challenges such as elevated inflation, high debt levels, volatile financial conditions, geopolitical tensions, fragmentation, and extreme weather events. While some economies have displayed remarkable resilience, the outlook for global growth remains modest compared to historical norms, even though the IMF has raised its global growth forecast for 2023. The World Trade Organization projects a slowdown in world merchandise trade volume growth from 2.7% in 2022 to 1.7% in 2023. Headline inflation is varying across countries and remains elevated in major economies. Although the pace of monetary tightening has slowed, policy rates could remain elevated for an extended period. Financial markets, previously bolstered by expectations of an early end to monetary tightening, have become volatile due to recent rating events and incoming data.

Domestic Growth Outlook: These external factors are likely to impact the growth trajectories of major advanced and emerging economies. However, India is expected to weather these external challenges better than many other nations.

The momentum of economic activity in India remains positive. Crop sowing has improved with steady progress in the monsoon. While the monsoon's temporal and spatial distribution has been uneven, industrial activity remains resilient, evident from indices like industrial production, core industries output, and purchasing managers' index (PMI) for manufacturing. Services activity is also robust, indicated by healthy expansion in e-way bills, toll collections, railway freight, and a significant rise in services PMI. Nevertheless, some sectors like commercial vehicle sales and domestic air cargo traffic have contracted in Q1 of 2023-24.

Aggregate demand indicators remain positive. Urban demand indicators like domestic air passenger traffic, passenger vehicle sales, and household credit are showing sustained growth. In rural areas, tractor and fertilizer sales have improved, although two-wheeler sales moderated. Agricultural credit growth and increased sales volumes for major fast-moving consumer goods (FMCG) companies suggest a budding recovery in rural demand, further supported by improving prospects for the kharif crop.

Investment activity has gained momentum, driven by government capital expenditure, improved business sentiment, and a revival in private capital expenditure in key sectors. The rise in import and production of capital goods further reinforces this trend. Construction activity also remains strong, as indicated by healthy growth in cement production and steel consumption. The manufacturing sector's capacity utilization stands above its long-term average, indicating positive economic conditions. The total resources flowing to the commercial sector from banks and other sources have increased during the current financial year. However, merchandise exports, non-oil non-gold imports, and services exports growth have decelerated due to sluggish external demand.

Looking ahead, these underlying developments, coupled with the upcoming festival season, are expected to support both private consumption and investment activity. Nonetheless, spillover effects from weak external demand and prolonged geopolitical tensions pose risks to the economic outlook. Taking all these factors into account, the projected real GDP growth for 2023-24 is 6.5%, with Q1 at 8.0%, Q2 at 6.5%, Q3 at 6.0%, and Q4 at 5.7%. Real GDP growth for Q1:2024-25 is projected at 6.6%. The risks to the outlook are balanced.

Inflation Assessment: Headline inflation moderated to 4.6% in Q1 of 2023-24, in line with projections from the June MPC meeting. June witnessed a slight uptick to 4.8% due to increased food inflation. However, core inflation, which excludes food and fuel, has declined by over 100 basis points from its recent peak in January 2023. July observed a spike in food inflation, primarily due to vegetables. Elevated tomato prices and increased costs for cereals and pulses contributed to this trend. Therefore, a notable increase in headline inflation is expected in the short term.
Historical trends suggest that vegetable prices could correct significantly in the coming months. Positive monsoon progress has brightened the outlook for kharif crops. Nevertheless, uncertainties persist regarding domestic food prices due to sudden weather events and the potential impact of El Niño conditions in August and beyond. Global food prices are also rising due to renewed geopolitical tensions. Crude oil prices have strengthened recently, but demand-supply uncertainties cloud its future trajectory.

Given these circumstances, projecting future inflation remains an ongoing process. We have the flexibility to adjust our inflation forecasts in each MPC meeting if necessary to provide better guidance. We must strike a balance between addressing idiosyncratic shocks and ensuring that they do not become persistent. Thus, our updated CPI inflation projections for 2023-24, assuming a normal monsoon, are revised to 5.4%, with Q2 at 6.2%, Q3 at 5.7%, and Q4 at 5.2%. CPI inflation for Q1:2024-25 is projected at 5.2%. The risks to these projections are balanced.

The projection for Q2 of 2023-24 is revised upwards due to the impact of vegetable prices. Given the likely short-term nature of these shocks, the monetary policy can tolerate higher inflation readings caused by such shocks for a certain period. However, frequent occurrences of such food price shocks could potentially undermine the anchoring of inflation expectations that we've been striving for since September 2022. It is vital to continue timely supply-side interventions to mitigate the severity and duration of such shocks. In such circumstances, vigilance over emerging trends and price stability risks is essential. We must be prepared to deploy policy instruments when needed. I reiterate that bringing headline inflation within the tolerance band is insufficient; our goal remains to align inflation with the 4% target.
Liquidity and Financial Market Conditions: Liquidity in the system has increased in recent months due to various factors such as the return of Rs.2000 banknotes, RBI's surplus transfer to the government, increased government spending, and capital inflows. Daily absorption under the liquidity adjustment facility (LAF) was Rs.1.7 lakh crore in June and Rs.1.8 lakh crore in July 2023.

Despite this surplus liquidity, market response to RBI's 14-day variable rate reverse repo (VRRR) auctions has been lukewarm, with banks opting for the less remunerative standing deposit facility (SDF). Shorter-term VRRR auctions (1-4 days maturity) have garnered better market response, reflecting increased risk aversion among banks in placing significant funds under the main operation. It is important to emphasize that fine-tuning operations are meant for special situations and should not become the norm.

Our approach to liquidity is to maintain an adequate level to meet the productive needs of the economy. Excessive liquidity can pose risks to both price and financial stability. Hence, we need to regularly assess the surplus liquidity and take additional measures as needed to manage excess liquidity. Starting from the fortnight commencing August 12, 2023, scheduled banks will be required to maintain an incremental cash reserve ratio (I-CRR) of 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023. This temporary measure aims to absorb the surplus liquidity resulting from various factors, including the reintroduction of Rs.2000 notes. This measure is for liquidity management purposes, and even after its implementation, there will be sufficient liquidity to meet the credit demands of the economy. The I-CRR will be reviewed on September 8, 2023, or earlier, with the aim of returning the impounded funds to the banking system before the festival season. The existing cash reserve ratio (CRR) remains unchanged at 4.5%.

Financial Stability: The Indian financial sector has demonstrated stability and resilience, evident in sustained bank credit growth, low levels of non-performing assets, and adequate capital and liquidity buffers. Macro stress tests indicate that scheduled commercial banks (SCBs) would be able to meet minimum capital requirements even under severe stress scenarios. However, we must not become complacent; vulnerabilities can emerge during calm periods, making it important to build buffers during such times. A stable financial system is crucial for both price stability and sustained growth. This responsibility is shared among regulated entities such as banks and NBFCs. The Reserve Bank remains committed to safeguarding the financial system from emerging challenges and expects the same commitment from regulated entities.

External Sector: India's current account deficit (CAD) stood at 2.0% of GDP in 2022-23, compared to 1.2% in 2021-22. The merchandise trade deficit narrowed in Q1 of 2023-24, with imports contracting more than exports. Services exports and remittances are expected to cushion the current account deficit. Therefore, CAD is expected to remain manageable in the current fiscal year.

Foreign portfolio investment (FPI) flows have been strong in 2023-24. Net FPI inflows reached $20.1 billion as of August 8, 2023, the highest since 2014-15. In contrast, the same period in the previous year saw net outflows of $12.6 billion. External commercial borrowings (ECBs) have also witnessed a turnaround, with net inflows of $6.0 billion in April-June 2023, compared to net outflows of $2.9 billion a year ago. Net foreign direct investment (FDI) flows to India, however, declined to $5.5 billion in April-May 2023 from $10.6 billion a year ago, reflecting a global slowdown in FDI flows. The external debt-to-GDP ratio improved to 18.9% at the end of March 2023 from 20.0% a year earlier.

The Indian rupee has remained stable since January 2023, and foreign exchange reserves have crossed the $600 billion mark, providing further strength to the Indian economy.

Review of Regulatory Framework for Financial Benchmark Administrators: We are revising the existing regulations issued in June 2019 to establish a comprehensive, risk-based framework for administering financial benchmarks. This framework will encompass all benchmarks related to foreign exchange, interest rates, money markets, and government securities. The revised directions will enhance confidence in the accuracy and integrity of financial benchmarks.

Infrastructure Debt Funds (IDFs) Enhancements: The regulatory framework for IDFs has been updated to enhance its effectiveness. Key changes include the withdrawal of the requirement for an IDF sponsor, allowing IDFs to directly finance toll-operate-transfer (ToT) projects, enabling IDFs to raise funds through external commercial borrowings (ECBs), and making tri-partite agreements optional for public-private partnership (PPP) projects. These modifications are aimed at bolstering infrastructure financing capacity in the country.

Enhancing Transparency in Interest Rate Resets: To improve transparency in the reset of interest rates on floating interest loans, a clear framework will be established. Regulated entities will be required to communicate effectively with borrowers for rate resets and provide options for switching to fixed rate loans or loan foreclosure. Additionally, disclosure of associated charges and key information will be mandated. These measures will further enhance consumer protection and promote fair practices.

Public Tech Platform for Frictionless Credit: The RBI, in collaboration with the Reserve Bank Innovation Hub (RBIH), has launched a pilot project for frictionless credit delivery through end-to-end digital processes. This initiative began with Kisan Credit Card (KCC) loans and has expanded to include dairy loans. A Public Tech Platform for Frictionless Credit delivery is being developed by the RBIH to expand the scope of digital lending processes. The platform will have an open architecture and API standards, allowing all financial sector players to connect seamlessly. This effort will accelerate credit access to underserved regions and promote financial inclusion.

Our progress in sustaining India's growth momentum is notable, but challenges persist. While inflation has moderated, risks remain due to global uncertainties, volatile food and energy prices, and geopolitical tensions. As we prepare for Independence Day, a sense of hope and promise fills the air. Let us remember the wise words of Mahatma Gandhi: "I have no doubt that our country would rise to the greatest height among the nations of the world." Thank you.