RBI keeps interest rates unchanged in hawkish policy; highlights retail inflation

Mumbai: The Reserve Bank of India (RBI) on Thursday left its key interest rates unchanged for a third straight meeting but signalled tighter policy if food prices drive inflation higher.

The monetary policy committee, which has three members from the central bank and a similar number of external members, held the benchmark repurchase rate (repo) at 6.50 per cent in a unanimous decision.

It retained the stance on "withdrawal of accommodation" but Governor Shaktikanta Das sounded hawkish when he highlighted that headline inflation needs to subside sustainably below 4 per cent and any surge in the inflation print, if continued for a longer period, may necessitate fresh action.

The hawkish stance was also reinforced by the unexpected announcement of reducing the cash in the banking system by raising the incremental cash reserve ratio (ICRR) to 10 per cent on the incremental NDTL (net demand and time liabilities) over the last 3 months. This will help in absorbing a large part of the excess liquidity created through the return of the Rs 2,000 notes and the large dividend to the government from RBI.

The move is expected to suck out about Rs 1 lakh crore from the banking system, he said, adding that this liquidity tightening measure will not impact credit needs of productive sectors.

"The job on inflation is still not done," Das said. "Inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions and weather-related uncertainties." The RBI raised its inflation forecast for the current financial year ending March 2024 to 5.4 per cent from 5.1 per cent earlier, citing pressures from food prices. In the July-September quarter, it saw inflation at 6.2 per cent, significantly higher than the 5.2 per cent earlier forecast.

"We do look through idiosyncratic shocks but if it shows signs of persistence, we have to act," he said detailing decision of the MPC meeting here.

The MPC drew confidence from moderation in core prints and expects a seasonal correction in food prices in the fourth quarter of 2023.

This is the third straight meeting where RBI kept interest rates unchanged. Prior to that, it had raised interest rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.

RBI retained its projection for Indian economic growth at 6.5 per cent for the current 2023-24 fiscal year (April 2023 to March 2024)."Aggregate demand conditions continue to be buoyant," Das said. Food price spikes in India, typical at the onset of the monsoon, drove up headline inflation in June, snapping a four-month downward trend.

Headline inflation, after reaching a low of 4.3 per cent in May 2023, rose in June and is expected to surge during July-August led by vegetable prices.

"While the vegetable price shock may reverse quickly, possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far," Das said. "These developments warrant a heightened vigil on the evolving inflation trajectory." The MPC, he said, "remains resolute in its commitment to aligning inflation to the 4 per cent target and anchoring inflation expectations".

"Bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4.0 per cent," he said.

Other measures announced on Thursday included a proposal to put in place a transparent framework for reset of interest rates on floating-interest loans. It will also provide borrowers options for switching to fixed-rate loans or foreclosure of loans.

RBI also allowed 'conversational payments' on UPI, which will enable users to engage in conversation with AI-powered systems to make payments. It also introduced offline payments on UPI using Near Field Communication (NFC) technology through 'UPI-Lite' on-device wallet and enhanced the transaction limit for small value digital payments in off-line mode from Rs 200 to Rs 500 within the overall limit of Rs 2,000 per payment instrument.