RBI MPC Meet: No surprise on repo rate, but here's what Shaktikanta Das said on Indian banking system

RBI MPC Meet Takeaways: On expected lines, the Reserve Bank of India (RBI) in its bi-monthly monetary policy meeting (MPC) announcements on Friday (October 6, 2023) kept the repo rate unchanged at 6.5 per cent for the fourth straight meet in a row. The repo rate (RBI’s key policy rate) also referred to as the repositioning or repurchase rate is the interest rate at which the country’s apex bank lends money to banks.

The decision comes in the backdrop of easing inflation and steady economic activity in the country even as issues concerning higher oil prices and erratic monsoon continue to weigh.

The RBI raised the repo rate by 250 bps (1 bps or basis point is 1/100th of a percentage point) to 6.5 per cent in February 2023.

Here are the major takeaways from the RBI’s 2023 MPC meet on Friday.

Repo rate and stance

The RBI’s six-member MPC unanimously maintained status quo with repo rates at 6.5 per cent for the fourth straight meet.

Further, with a 5:1 majority, the committee will continue to focus on withdrawal of accommodation to rein in inflation. 

CPI inflation

The RBI has maintained overall CPI inflation forecast for the Financial Year 2024 unchanged at 5.4 per cent.

Das said that uncertainty enshrouds the inflation outlook due to a fall in kharif sowing, lower reservoir levels, and volatile global food and energy prices.

The RBI governor said that recurring incidents of large food price shocks can import generalisation and persistence to headline inflation.

Indian banking system

The RBI governor in his speech on Friday said that moderation in excess liquidity conditions as a result of the combined impact of I-CRR and advance tax outflows in September has resulted in greater recourse to the marginal standing facility (MSF) by banks.

Speaking more on the Indian banking system, Das said that elevated levels of MSF borrowings amidst substantial funds parked under the standing deposit facility (SDF) is symptomatic of skewed liquidity distribution in banks.

He said that it was reflected in the firming up of the weighted average call rate (WACR) – the operating target of monetary policy.

Despite such hardening at the short-end of the term structure, the average term spread in the G-sec market (10-year minus 91-day Treasury Bills) remained at around 40 basis points in August-September suggesting stable financial conditions, Das said in this speech. 

Financial stability

In what can strengthen Indians' belief in the local economy, Das said that the Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth and robust earnings growth.

He said that the credit growth of the banks is broad-based and backed by strong fundamentals of financial institutions. 

The RBI governor reinforced his belief in non-banking financial companies (NBFCs), saying that the financial indicators of such companies are also in line with that of the banking system as per the latest available data for June 2023. 

Personal loan risk safeguard measures

Das said that certain components of personal loans are are recording very high growth, adding that the central bank is closely monitoring any signs of incipient stress.

He advised banks and NBFCs to strengthen their internal surveillance mechanisms, address the build-up of risks, and institute suitable safeguards in their own interest. 

The need of the hour is robust risk management and stronger underwriting standards, Das said in his speech.

Inflation target

In the MPC meet, Das reiterated that India's inflation target is 4 per cent and not 2 to 6 per cent.

He said that the central bank is targeting to aligning the inflation target to a durable basis while supporting growth.

FPI flows rise

The RBI governor said that Foreign Portfolio Investments (FPIs) have witnessed a significant turnaround in the current financial with net inflows rising by $20.3 billion in September 2023 against the net outflow in the preceding two years.

He further said that the number and total amount of external commercial borrowing agreements have grown markedly during the April-August 2023 period.

Global headline inflation

The RBI governor said that global headline inflation could remain higher for a longer time as against global trends.

He said that domestic eco activity is exhibiting resilience due to a strong domestic demand. 

He further said that healthy balance sheets of corporates and banks bode well for the Indian economy.

However, he accepted that volatility in global finance market and and slowdown pose a risk to the Indian economy.