RBI MPC retains repo rate at 6.5% for the sixth time, projects 7% GDP growth rate for FY25; check key highlights

The Reserve Bank of India's Monetary Policy Committee (MPC) maintained the repo rate at 6.50 per cent for the sixth consecutive time in the last policy meeting of fiscal 2023-24, which was held between February 6 and 8.
 
RBI Governor Shaktikanta Das also announced that the MPC decided to retain the "withdrawal of accommodation" monetary stance.
 
This was the first MPC meeting after the interim Budget 2024. Das stated that, taking economic conditions into account, the MPC predicts a GDP growth rate of 7 per cent in FY25.
 
ZeeBiz.com takes you through some of the key takeaways of the MPC meeting.

Repo rate

The repo rate was kept unchanged at 6.50 per cent. The RBI last modified the repo rate in February 2023, raising the rate from 6.25 per cent to 6.50 per cent, an increase of 25 basis points (bps).

Key fact statement (KFS) for retail and MSME loans & advances

Das announced that lenders need to provide their customers with a KFS, or key fact statement, that contains all essential facts about a loan arrangement, including the loan's total cost, in a plain and easy-to-understand style.

Currently, KFS is specifically mandated in respect of loans by scheduled commercial banks to individual borrowers, digital lending by REs, and microfinance loans.

"Now, it has been decided to mandate all REs to provide the ‘Key Fact Statement’ (KFS) to the borrowers for all retail and MSME loans. Providing critical information about the terms of the loan agreement, including all-inclusive interest costs, will greatly benefit the borrowers in making an informed decision," the statement read.

GDP Forecast

Real GDP growth for FY25 is expected to be 7 per cent, with growth of 7.2 per cent in Q1, 6.8 per cent in Q2, 7.0 per cent in Q3, and 6.9 per cent in Q4.

Inflation Forecast

CPI inflation in January–March 2024 is expected to fall to 5.0 per cent from 5.2 per cent before. CPI inflation in April–June 2024 (Q1) is expected to fall to 5.0 per cent from 5.2 per cent before. The July–September 2024 (Q2) CPI inflation projection remains at 4.0 per cent. CPI inflation is expected to fall to 4.6 per cent in October–December 2024, down from 4.7 per cent before. The CPI inflation projection for January–March 2025 is 4.7 per cent.

Hedging of Gold Price Risk in the Over-the-Counter (OTC) Market

In December 2022, the resident entities were given access to recognised exchanges in the International Financial Services Centre (IFSC). The RBI governor has now announced plans to enable them to hedge gold prices in the IFSC's over-the-counter (OTC) section. This will give resident entities greater flexibility and easier access to derivative instruments for hedging their exposure to gold prices.

Liquidity Measures

The RBI remains nimble and flexible in managing liquidity, said the governor. "In September 2023, systemic liquidity fell to a deficit after four and a half years. However, after accounting for government cash balances, potential liquidity in the banking sector remains in excess," Shaktikanta Das said.
 
Das also announced that India's foreign exchange reserves were $622.5 billion as of February 2, 2024.

Regulatory framework for electronic trading platforms (ETPs)

In October 2018, the Reserve Bank of India (RBI) established a regulatory framework for ETPs that execute transactions in financial instruments authorised by it. The framework, which aims to provide equitable access through clear, safe, and efficient trading processes, robust trading infrastructures, and the prevention of market abuse, has subsequently licenced 13 ETPs managed by five operators.
 
Over the last several years, the onshore forex market has become more integrated with offshore markets, there have been significant technological improvements, and product diversity has expanded.
 
Market makers have also requested access to offshore ETPs that provide approved Indian rupee (INR) products. In light of these developments, it has been determined to evaluate the regulatory framework for ETPs. The amended regulatory framework will be released separately for public response, the statement said.

Aadhaar-Enabled Payment System (AePS) security

Das further announced plans to improve the security of AePS transactions. Banks should streamline the onboarding process for AePS touchpoint operators, which includes mandated due diligence. Additional fraud risk management standards will be explored by the RBI, the statement read.

Rupee exchange rate

The exchange rate of the Indian rupee remained fairly stable in the current fiscal.

Digital payment transactions

"The Reserve Bank of India has long stressed digital payment security, particularly the necessity for an additional factor of authentication (AFA). Though the RBI has not mandated any specific AFA, the payment environment has primarily used SMS-based One Time Password (OTP)," the policy statement read.
 
With technological advancements, various authentication systems have evolved in recent years. To make it easier to apply such techniques for digital security, a "framework for authentication of digital payment transactions" based on principles is presented, the policy statement said.

Introduction of programmability and offline functionality in CBDC pilot

The Central Bank digital currency retail (CBDC-R) project presently supports P2P and P2M transactions via digital rupee wallets issued by pilot banks. It is now proposed to provide programmability that will allow users, such as government organisations, to ensure that payments are provided for certain benefits. Similarly, corporations will be able to schedule certain expenses, such as business travel, for their staff, the governor said while announcing monetary policy.
 
Secondly, it is suggested to provide offline capability to CBDC-R to facilitate transactions in places with weak or restricted internet access. Multiple offline solutions (proximity and non-proximity-based) will be evaluated in mountainous, rural, and urban settings. The pilots will gradually introduce these features.
 
RBI, as per the statement, will introduce offline functionality in CBDC-Retail for transactions in areas with poor or limited internet connectivity.

Next RBI MPC meeting

The next RBI MPC is scheduled for April 3–5, 2024.