RBI Monetary Policy Updates – June 2023

The Monetary Policy Committee (MPC) meeting was held today June 8, 2023, to evaluate the prevailing macroeconomic conditions and make informed decisions. After a comprehensive assessment, the MPC has announced that it would maintain the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. Similarly, the standing deposit facility (SDF) rate would remain unchanged at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate would be retained at 6.75%. The MPC remained focused on the withdrawal of accommodation to ensure inflation progressively align with the target while supporting growth. These decisions were taken to achieve the mid-term target of CPI inflation of 4% with a band of 2% to 6%.

Repo Rate

The repo rate is the rate at which commercial banks in India borrow funds from the Reserve Bank of India (RBI) by selling their securities. This borrowing is typically done to address liquidity shortages or to comply with statutory requirements.

All the members of the MPC unanimously voted to keep the repo rate unchanged. Five members voted to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while one expressed reservation on this part of the resolution.

India’s real GDP growth accelerated to 6.1% in Q4, 2022-23, supported by fixed investment and higher net exports. The overall real GDP growth for the fiscal year 2022-23 was reported at 7.2%, exceeding the earlier estimate of 7.0%. In Q1 2023-2024, domestic economic activity in India remained resilient, with manufacturing and services sectors experiencing sustained expansion. High-frequency indicators, such as PMIs, domestic air passenger traffic, e-way bills, toll collections, and diesel consumption, showed positive trends, while railway freight and port traffic displayed modest growth.

In April 2023, the country experienced a significant drop in CPI inflation, falling to 4.7% from 6.4% in February. This decline was driven by favourable base effects, resulting in lower inflation across major categories. The food group saw easing inflation, particularly in cereals, eggs, milk, fruits, meat and fish, spices, and prepared meals.

Additionally, deflation deepened in edible oils. Within the fuel group, inflation decreased for LPG, firewood, and chips, and kerosene prices slipped into deflation. Core inflation, excluding food and fuel, decreased due to lower inflation in clothing and footwear, household goods and services, health, transport and communication, personal care and effects, and recreation and amusement sub-groups.

India’s foreign exchange reserves reached USD 595.1 billion as of June 2, 2023.

Outlook

The RBI has shared the future trajectory of headline inflation in India is likely to be shaped by food price dynamics, particularly the expected correction in wheat prices and the pressure on milk prices due to supply shortages. The projection of a normal monsoon is encouraging for agricultural production, but close monitoring is necessary. Crude oil prices have eased, but uncertainty remains. Early survey results indicate expectations of higher input costs and output prices in various sectors. Taking all these factors into consideration, CPI inflation for 2023-24 is projected at 5.1%, with balanced risks.

Considering the factors and assessments, the Reserve Bank of India (RBI) has announced its projection for real GDP growth in 2023-2024 is estimated to be at 6.5%, with expected growth rates of 8.0% in Q1, 6.5% in Q2, 6.0% in Q3, and 5.7% in Q4. The risks to this projection are deemed to be evenly balanced.