RBI Monetary Policy: Full text of RBI Governor Shaktikanta Das speech

RBI Monetary Policy, RBI Governor speech today: Here is the full text of RBI Governor Shaktikanta Das speech today:-

As I set out the first monetary policy statement of the new year, I am reminded of the  historical  significance  of  2023  for  the  Reserve  Bank  of  India.  From  being  a  Joint  Stock  Company,  the  Reserve  Bank  was  brought  into  public  ownership  on  January  1,  1949.1  Thus,  2023  marks  the  75th  year  of  public  ownership  of  the  Reserve  Bank  and  its  emergence as a national institution. This is  an opportune moment to briefly reflect upon  the evolution of monetary policy over this period. In the two decades after independence,  the Reserve Bank’s role was to support the credit needs of the economy under the five- year  plans. 

The  following  two  decades  were  characterised  by  bank  nationalisation  in  1969,  oil  shocks,  monetisation  of  large  budget  deficits  and  sharp  rise  in  money  supply  and  inflation.  Monetary  targeting  was  adopted  in  the  mid-1980s  to  contain  growth  in  money  supply  and  curb  inflation  pressures.  Since  the  early  1990s,  the  Reserve  Bank   focused  on  market  reforms  and  institution  building.  A  multiple  indicator  approach  was  adopted in April 1998 under which a host of indicators were monitored for policy making.  In  the  aftermath  of  the  global  financial  crisis  and  the  taper  tantrum,  as  inflationary  conditions  worsened  in  India,  flexible  inflation  targeting  (FIT)  was  formally  adopted  in   June  2016  to  provide  a  credible  nominal  anchor  for  monetary  policy.  As  we  know,  the  primary objective of monetary policy under the FIT framework is to maintain price stability  while keeping in mind the objective of growth.  
 
2. Coming  to  present  times,  the  unprecedented  events  of  the  last  three  years  have  put to test monetary policy frameworks globally. In a very short period, monetary policies across  the  world  have  veered  from  one  extreme  to  the  other  in  response  to  a  series  of  overlapping shocks.  In  contrast  to  the  Great  Moderation  era  of  the  1990s  and  the  early  years of this century, monetary policy was confronted with an unprecedented contraction in  economic  activity  followed  by  a  surge  in  global  inflation.  This  calls  for  a  deeper  understanding  of  the  structural  changes  in  the  global  economy  and  inflation  dynamics,  and their implications for the conduct of monetary policy. 
 
3. In  the  current  unsettled  global  environment,  emerging  market  economies  (EMEs)  are facing sharp trade-offs between supporting economic activity and controlling inflation, while  preserving  policy  credibility.  As  global  fault  lines  emerge  in  trade,  technology  and  investment  flows,  there  is  an  urgent  need  to  reinforce  global  cooperation.  The  world  is  looking to India, now at the helm of G-20, to energise global partnership in several critical areas. This reminds me of what Mahatma Gandhi had said: “I do believe that...India...can  make  a  lasting  contribution  to  the  peace  and  solid  progress  of  the world.”  

Decisions and Deliberations of the Monetary Policy Committee (MPC) 
 
4. The  Monetary  Policy  Committee  (MPC)  met  on  6th,  7th  and  8th  February  2023.  Based  on  an  assessment  of  the  macroeconomic  situation  and  its  outlook,  the  MPC  decided by a majority of 4 members out of 6 to increase the policy repo rate by 25 basis points to 6.50 per cent, with immediate effect. Consequently, the standing deposit facility  (SDF)  rate  will  stand  revised  to  6.25  per  cent;  and  the  marginal  standing  facility  (MSF)  rate and the Bank Rate to 6.75 per cent. The MPC also decided by a majority of 4 out of 6  members  to  remain  focused  on  withdrawal  of  accommodation  to  ensure  that  inflation  remains within the target going forward, while supporting growth. 

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5. Let me now explain the MPC’s rationale for these decisions on the policy rate and the  stance.  The  global  economic  outlook  does  not  look  as  grim  now  as  it  did  a  few  months ago. Growth prospects in major economies have improved, while inflation is on a  descent,  though  it  still  remains  well  above  the  target  in  major  economies.  The  situation  remains fluid and uncertain. Reflecting the recent optimism, the IMF has revised upwards the global growth estimates for 2022 and 2023.3 As price pressures wane, several central banks  have  opted  for  slower  rate  hikes  or  pauses.  The  US  dollar  has  retreated  sharply  from  its  highest  level  in  two  decades.  Tighter  financial  conditions  caused  by  aggressive  monetary  policy  actions,  volatile  financial  markets,  debt  distress,  protracted  geopolitical  hostilities  and  fragmentation  continue  to  impart  high  uncertainty  to  the  outlook  for  the  global economy.  
 
6. Amidst  these  volatile  global  developments,  the  Indian  economy  remains  resilient.  Real GDP growth is estimated at 7.0 per cent in 2022-23, according to the first advance estimate  of  the  National  Statistical  Office  (NSO).  Higher  rabi  acreage,  sustained  urban  demand,  improving  rural  demand,  robust  credit  expansion,  gains  in  consumer  and  business  optimism  and  the  government’s  enhanced  thrust  on  capital  expenditure  and  infrastructure  in  the  Union  Budget  2023-24  should  support  economic  activity  in  the  coming  year.  Weak  external  demand  and  the  uncertain  global  environment,  however,  would be a drag on domestic growth prospects. 
 
7. Consumer  price  inflation  in  India  moved  below  the  upper  tolerance  level  during  November-December  2022,  driven  by  a  strong  decline  in  prices  of  vegetables.  Core  inflation, however, remains sticky. 
 
8. Looking  ahead,  while  inflation  is  expected  to  moderate  in  2023-24,  it  is  likely  to  rule above the 4 per cent target. The outlook is clouded by continuing uncertainties from  geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude oil prices. At the same time, economic activity in India is expected to hold  up well. The rate hikes since May 2022 are still working their way through the system. On balance,  the  MPC  was  of  the  view  that  further  calibrated  monetary  policy  action  is  warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects. Accordingly, the MPC decided  to  raise  the  policy  repo  rate  by  25  basis  points  to  6.50  per  cent.  The  MPC  will  continue  to  maintain  strong  vigil  on  the  evolving  inflation  outlook  so  as  to  ensure  that  it  remains within the tolerance band and progressively aligns with the target. 
                                                 
9. Inflation  is  expected  to  average  5.6  per  cent  in  Q4:2023-24  while  the  policy  repo   rate  is  6.50  per  cent.  Adjusted  for  inflation,  the  policy  rate  still  trails  its  pre-pandemic levels.  Liquidity  remains  in  surplus,  with  an  average  daily  absorption  of  ₹1.6  lakh  crore under  the  LAF  in  January  2023.  The  overall  monetary  conditions,  therefore,  remain   accommodative  and  hence,  the  MPC  decided  to  remain  focused  on  withdrawal  of  accommodation. 

Assessment of Growth and Inflation 

Growth 

10. Available  data  for  Q3  and  Q4:2022-23  indicate  that  economic  activity  in  India  remains  resilient.  Urban  consumption  demand  has  been  firming  up,  driven  by  sustained  
recovery  in  discretionary  spending,  especially  on  services  such  as  travel,  tourism  and  hospitality.  Passenger  vehicle  sales  and  domestic  air  passenger  traffic  posted  robust  
year-on-year (y-o-y) growth. Domestic air passenger traffic crossed pre-pandemic levels for the first time in December 2022. Rural demand continues to show signs of improvement  as  tractor  sales  and  two-wheeler  sales  expanded  in  December.  Several  high-frequency indicators4 also point towards strengthening of activity. 
 
11. Investment  activity  continues  to  gain  traction.  Non-food  bank  credit  expanded  by  16.7  per  cent  (y-o-y)  as  on  January  27,  2023.  The  total  flow  of  resources  to  the  commercial  sector  has  increased  by  ₹20.8  lakh  crore  during  2022-23  so  far  as  against  ₹12.5  lakh  crore  a  year  ago.  Indicators  of  fixed  investment  –  cement  output;  steel  consumption;  and  production  and  import  of  capital  goods  –  registered  robust  growth  in  November and December. In several sectors such as cement, steel, mining and chemicals, there are signs that additional capacity is being created in the private sector. According to the RBI’s survey, seasonally adjusted capacity utilisation increased to 74.5 
per  cent  in  Q2:2022-23.  The  drag  from  net  external  demand,  on  the  other  hand,  continued as merchandise exports contracted in Q3:2022-23.  
 
12. On  the  supply  side,  agricultural  activity  remains  strong  with  good  rabi  sowing, higher reservoir levels, good soil moisture, favourable winter temperature and comfortable  availability  of  fertilisers.5  PMI  manufacturing  and  PMI  services  remained  in  expansion at 55.4 and 57.2 respectively, in January 2023.   

13. Turning to the outlook, the expected higher rabi output has improved the prospects of  agriculture  and  rural  demand.  The  sustained  rebound  in  contact-intensive  sectors  should support urban consumption. Broad-based credit growth, improving capacity utilisation,  government’s  thrust  on  capital  spending  and  infrastructure  should  bolster  investmentactivity. According to our surveys, manufacturing, services and infrastructure sector  firms  are  optimistic  about  the  business  outlook.  On  the  other  hand,  protracted geopolitical tensions, tightening global financial conditions and slowing external demand may  continue  as  downside  risks  to  domestic  output.  Taking  all  these  factors  into  consideration, real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.0 per cent; and Q4 at 5.8 per cent. The risks are evenly balanced. 

Inflation  

14. Headline CPI inflation moderated by 105 basis points during November-December 2022 from its level of 6.8 per cent in October 2022. This was due to a softening in food inflation on the back of a sharp deflation in vegetable prices, which more than offset the inflationary  pressures  from  cereals,  protein-based  food  items  and  spices.  As  a  result  of  this earlier than anticipated and steeper seasonal decline in vegetable prices, inflation for Q3:2022-23 has turned out to be lower than our projections.  Core CPI inflation (i.e., CPI excluding food and fuel), however, remained elevated.  
 
15. Going  ahead,  the  food  inflation  outlook  will  benefit  from  a  likely  bumper  rabi harvest  led  by  wheat  and  oilseeds.  Mandi  arrivals  and  kharif  paddy  procurement  have  been  robust,  resulting  in  improvement  in  buffer  stocks  of  rice.  All  these  developments  augur favourably for the food inflation outlook in 2023-24.   

16. Considerable  uncertainties  remain  on  the  likely  trajectory  of  global  commodity  prices, including price of crude oil. Commodity prices may remain firm with the easing of COVID19 related  restrictions  in  some  parts  of  the  world.  The  ongoing  pass-through  of  input  costs,  especially  in  services,  could  keep  core  inflation  at  elevated  levels. The  commitment  to  fiscal  consolidation  that  has  been  carried  forward  in  the  Union  Budget  2023-24  and  the  future  trajectory  of  reducing  the  gross  fiscal  deficit  will  engender  an environment of macroeconomic stability. This augurs well for the inflation outlook. Further, the low volatility of the Indian rupee relative to peer currencies limits the impact of imported price pressures and other global spillovers. Taking into account these factors and assuming an average crude oil price (Indian basket) of US$ 95 per barrel, inflation is projected  at  6.5  per  cent  in  2022-23,  with  Q4  at  5.7  per  cent.  On  the  assumption  of  a  normal monsoon, CPI inflation is projected at 5.3 per cent for 2023-24, with Q1 at 5.0 per cent, Q2 at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.6 per cent. The risks are evenly balanced. 
 
17. Headline  inflation  has  moderated  with  negative  momentum  in  November  and  December 2022, but the stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down inflation. Thus, monetary policy has to be tailored to ensuring a durable disinflation process. A rate hike of 25 basis points is considered as appropriate at the current juncture. The reduction in the size of the rate hike provides the opportunity to  evaluate  the  effects  of  the  actions  taken  so  far  on  the  inflation  outlook  and  on  the  economy at large. It also provides elbow room to weigh all incoming data and forecasts to determine  appropriate  actions  and  policy  stance,  going  forward.  Monetary  policy  will  continue  to  be  agile  and  alert  to the  moving  parts  in  the  inflation  trajectory  to  effectively  address the challenges to the economy. 
 
Liquidity and Financial Market Conditions 
 
18. As  we  approach  the  end  of  2022-23,  it  is  worthwhile  to  recapitulate  the  key  developments on the monetary policy front over the last one year. After the onset of the war  in  Europe,  which  drastically  altered  the  growth-inflation  dynamics  across  the  world,  including  India,  we  have  taken  a  series  of  steps  in  the  best  interest  of  the  Indian  economy. We accorded primacy to price stability over growth in April 2022; we instituted a major reform in the monetary policy operating procedure through the introduction of the standing  deposit  facility  (SDF);  we  restored  the  width  of  the  policy  corridor  to  its  pre-pandemic level; we raised the repo rate by 40 bps and the cash reserve ratio (CRR) by 50 bps inan off-cycle meeting in May; we shifted the policy stance to focus on withdrawal of accommodation; we continued the rate tightening cycle in every meeting of the MPC; and we  adopted  a  nimble  and  flexible  approach  to  liquidity  management  by  conducting  both  variable  rate  reverse  repo  (VRRR)  and  variable  rate  repo  (VRR)  operations  as  per  requirement. As a result of all these measures, the real policy rate has been nudged into positive  territory;  the  banking  system  has  moved  out  of  the  Chakravyuh6  of  excess  liquidity; inflation is moderating; and economic growth continues to be resilient. 
 
19. As  I  make  this  statement,  system  liquidity  remains  in  surplus,  though  of  a  lower  order compared to April 2022. In the period ahead, while higher government expenditure and the anticipated return of forex inflows are likely to augment systemic liquidity, it would get modulated by the scheduled redemption of LTRO and TLTRO7 funds during February to April 2023. The Reserve Bank will remain flexible and responsive towards meeting the productive requirements of the economy. We will conduct operations on either side of the LAF, depending on the evolving liquidity conditions.   

20. As part of our gradual move towards normalising liquidity and market operations, it has now been decided to restore market hours for the Government Securities market to the pre-pandemic timing of 9 am to 5 pm.8 Moreover, as part of our ongoing endeavour to further  develop  the  government  securities  market,  we  propose  to  permit  lending  and  borrowing  of  G-secs.  This  will  provide  investors  with  an  avenue  to  deploy  their  idle  securities,  enhance  portfolio  returns  and  facilitate  wider  participation.  This  measure  will  also  add  depth  and  liquidity  to  the  G-sec  market;  aid  efficient  price  discovery;  and  work  towards  a  smooth  completion  of  the  market  borrowing  programme  of  the  centre  and  states.   

21. The  pace  of  transmission  of  monetary  policy  actions to  lending  and  deposit rates  has  strengthened  in  the  current  tightening  cycle.  The  weighted  average  lending  rates  (WALR)  on  fresh  rupee  loans  and  outstanding  loans  increased  by  137  bps  and  80  bps  respectively,  during  May  to  December  2022.  The  weighted  average  domestic  term  
deposit rate on fresh deposits and outstanding deposits increased by 213 bps and 75 bps respectively.   

22. The  Indian  Rupee  has  remained  one  of  the  least  volatile  currencies  among  its  Asian peers in calendar year 2022 and continues to be so this year also. Similarly, the depreciation  and  the  volatility  of  the  Indian  rupee  during  the  current  phase  of  multiple  shocks  is  far  lower  than  during  the  global  financial  crisis  and  the  taper  tantrum. In  a fundamental  sense,  the  movements  of  the  rupee  reflect  the  resilience  of  the  Indian  economy.  

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External Sector 

23. The current account deficit (CAD) for the first half of 2022-23 stood at 3.3 per cent of  GDP.  The  situation  has  shown  improvement  in  Q3:2022-23  as  imports  moderated  in  the  wake  of  lower  commodity  prices,  resulting  in  narrowing  of  the  merchandise  trade  deficit.  Further,  services  exports  rose  by  24.9  per  cent  (y-o-y)  in  Q3:2022-23,  driven  by  software,  business  and  travel  services.  Global  software  and  IT  services  spending  is  expected  to  remain  strong  in  2023.  Remittance  growth  for  India  in  H1  of  2022-23  was  around  26  per  cent  –  more  than  twice  the  World  Bank’s  projection  for  the  year.  This  is  likely  to  remain  robust  owing  to  better  growth  prospects  of  the  Gulf  countries.  The  net  balance  under  services  and  remittances  are  expected  to  remain  in  large  surplus,  partly  offsetting the trade deficit. The CAD is expected to moderate in H2:2022-23 and remain eminently manageable and within the parameters of viability.11 
 
24. On  the  financing  side,  net  foreign  direct  investment  (FDI)  flows  remain  strong  at  US  $  22.3  billion  during  April-December  2022  (US$  24.8  billion  in  the corresponding period last year). Foreign portfolio flows have shown signs of improvement with positive flows  of  US$  8.5  billion  during  July  to  February  6,  led  by  equity  flows  (foreign  portfolio  flows  are,  however,  negative  during  the  financial  year  so  far).  Net  inflows  under  non-resident deposits increased to US$ 3.6 billion during April-November 2022 from US $ 2.6 billion a year ago, boosted by the Reserve Bank’s July 6th measures. Foreign exchange reserves  have  rebounded  from  US$  524.5  billion  on  October  21,  2022  to  US$  576.8  billion as on January 27, 2023 covering around 9.4 months of projected imports for 2022-23. India’s external debt ratios are low by international standards. 12 
 
Additional Measures 

25. I shall now announce certain additional measures. 
 
Penal Charges on Loans 

26. At present, Regulated Entities (REs) are required to have a policy for levy of penal interest  on  advances.  The  REs,  however,  follow  divergent  practices  on  levying  of  such  charges.  In  certain  cases,  these  charges  are  founded  to  be  excessive.  To  further enhance  transparency,  reasonableness  and  consumer  protection,  draft  guidelines  on  levy of penal charges will be issued to obtain comments from stakeholders.  
  
Climate Risk and Sustainable Finance 

27. Recognising  the  importance  of  climate  related  financial  risks  which  may  have   financial  stability  implications,  the  Reserve  Bank  had  issued  a  Discussion  Paper  on  
Climate  Risk  and  Sustainable  Finance  in  July  2022.  Based  on  the  feedback  received,  it   has been decided to issue guidelines for REs on (i) a broad framework for acceptance of 
Green  Deposits;  (ii)  disclosure  framework  on  Climate-related  Financial  Risks;  and  (iii)  guidance on Climate Scenario Analysis and Stress Testing.  

Expanding the Scope of TReDS 
 
28. For the benefit of MSMEs, the Reserve Bank had introduced a framework in 2014 to  facilitate  financing  of  their  trade  receivables  through  Trade  Receivables  Discounting  System  (TReDS).  It  is  now  proposed  to  expand  the  scope  of  TReDs  by  (i)  providing  insurance  facility  for  invoice  financing;  (ii)  permitting  all  entities/institutions  undertaking  factoring business to participate as financiers in TReDS; and (iii) permitting re-discounting  of  invoices  (that  is,  developing  a  secondary  market  in  TReDS).  These  measures are expected to improve the cash flows of the MSMEs.  
 
Extending UPI for Inbound Travellers to India  

29. UPI  has  become  hugely  popular  for  retail  digital  payments  in  India.  It  is  now  proposed to permit all inbound travellers to India to use UPI for their merchant payments  (P2M)  while  they  are  in  the  country.  To  begin  with,  this  facility  will  be  extended  to   travellers from G-20 countries arriving at select international airports.   
 
QR Code based Coin Vending Machine - Pilot project  

30. The  Reserve  Bank  of  India  will  launch  a  pilot  project  on  QR  Code  based  Coin Vending  Machine  (QCVM)  in  12  cities.  These  vending  machines  will  dispense  coins  against  debit  to  the  customer’s  account  using  UPI  instead  of  physical  tendering  of  banknotes.  This  will  enhance  the  ease  of  accessibility  to  coins.  Based  on  the  learnings  from  the  pilot,  guidelines  will  be  issued  to  banks  to  promote  distribution  of  coins  using  these machines. 
 
Conclusion 
 
31. As  we  begin  a  new  year,  it  is  a  good  time  to  reflect  upon  our  journey  so  far  and  what  lies  ahead.  When  I  look  back,  it  is  heartening  to  note  that  the  Indian economy  successfully  dealt  with  multiple  major  shocks  in  the  last  three  years  and  has  emerged  stronger  than  before.  India  has  the  inherent  strength,  an  enabling  policy  environment,  and strong macroeconomic fundamentals and buffers to deal with the future challenges. I am  reminded  here  of  the  words  of  Netaji  Subhas  Chandra  Bose:  “........never  lose  your  faith in the destiny of India”.13 
 
Thank you. Namaskar.