RBI Monetary Policy Live : Governor Shaktikanta Das Press Conference

Our season, what we call the Vasant Ritu. It's a season of hope and optimism. I take this opportunity to convey my season's greetings to everyone. 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 1st January 1949. 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 characterized by Bank nationalization in 1969, the oil shocks, monetization of large budget deficits, and a 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, as everyone knows, 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 were seen 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 flexible inflation targeting framework is to maintain price stability while keeping in mind the objective of growth. Coming to present times, the unprecedented events of the last three years have put to test monetary policy frameworks across the world. 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 part of the current 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. In the current unsettled global environment, emerging market economies 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 G20, to energize 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.' I would now focus on the decisions and deliberations of the Monetary Policy Committee. As you would be aware, the MPC met on 6th, 7th, and 8th February. Based on an assessment of the macroeconomic situation and its outlook, the MPC decided by a majority of four members out of six to increase the policy repo rate by 25 basis points to 6.5 percent with immediate effect. Consequently, the Standing Deposit Facility (SDF) rate will stand revised to 6.25 percent, and the Marginal Standing Facility (MSF) rate and the Bank Rate to 6.75 percent. The MPC also decided by a majority of four out of six members to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth. 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 inflation still remains well above the target in major economies. The situation remains fluid and uncertain. Reflecting this recent optimism, the IMF has revised upwards the global growth estimates for 2022 and 2023. As price pressures ease, 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 tensions, and fragmentation continue to impart high uncertainty to the outlook for the global economy. Amidst these volatile global developments, the Indian economy remains resilient. Real GDP growth is estimated at 7 percent 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 recently presented 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 the domestic growth prospects. Consumer price inflation in India moved below the upper tolerance level during November and December 2022, driven by a strong decline in prices of vegetables. Core inflation, however, remains sticky. Looking ahead, while inflation is expected to moderate in 2023-24, it is likely to rule above the 4 percent 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 6.5 percent. The MPC will continue to maintain a strong vigil on the evolving inflation outlook so as to ensure that it remains within the tolerance band and progressively aligns with the target. Inflation is expected to average 5.6 percent in the fourth quarter of 2023-24, while the policy repo rate after today's revision now stands at 6.5 percent. 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. I would now like to provide our assessment of growth and inflation. First, I would like to take up growth. Available data for Q3 and Q4 of the current financial year (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 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 indicators also point towards strengthening of activity. I have listed some of the highest frequency indicators which show improvement and strengthening of activity in the footnote of my statement. As you know, the statement will be uploaded on the RBI website, so if you are interested, you may like to have a look at it. Investment activity continues to gain traction. Non-food bank credit expanded by 16.7 percent as on January 27, 2023. The total flow of resources to the commercial sector has increased by rupees 20.8 lakh crore during 2022-23 so far, as against 12.5 lakh crore rupees a year ago. Indicators of fixed investment, that is 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 survey, seasonally adjusted capacity utilization increased to 74.5 percent in Q2 2022-23. The drag from net external demand, on the other hand, continued as merchandise exports contracted in Q3 2022-23. On the supply side, agricultural activity remains strong with good rabi sowing, higher reservoir levels, good soil moisture, favorable winter temperatures, and comfortable availability of fertilizers. PMI Manufacturing and PMI Services remained in expansion at 55.4 and 57.2 respectively in January 2023. 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, improved capacity utilization, and the government's thrust on capital expenditure and infrastructure in the Union Budget recently presented should bolster investment activity. Let me repeat: broad-based credit growth, improving capacity utilization, and the government's thrust on capital spending and infrastructure should bolster investment activity. 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, the real GDP growth for 2023-24 is projected at 6.4 percent. I repeat: the real GDP growth for 2023-24, that's for the next financial year, is projected at 6.4 percent, with Q1 at 7.8 percent, Q2 at 6.2 percent, Q3 at 6 percent, and Q4 at 5.8 percent. The risks are evenly balanced. I would now like to turn to inflation. Headline CPI inflation moderated by 105 basis points during November-December 2022 from its level of 6.8 percent in October 2022. So October 2022 it was 6.8 percent, and by end December, going by the December data, there was a moderation of 105 basis points, and that was quite a significant moderation. This was due to a softening in food inflation on the back of 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 steeper seasonal decline in vegetable prices, inflation for Q3 2022-23 has turned out to be lower than our projections. Core inflation, that is CPI excluding food and fuel, however, remained elevated. Going ahead, the food inflation outlook will benefit from a likely bumper rabi harvest, led by wheat and oilseeds. Monday arrivals and curry paddy procurement have been robust, resulting in improvement in buffer stocks of rice. All these developments augur favorably for the food inflation outlook in 2023-24. Considerable uncertainties remain on the likely trajectory of global commodity prices, including the price of crude oil. Commodity prices may remain firm with the easing of COVID-19 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) at US dollar 95 per barrel, inflation is projected at 6.5 percent for the current financial year, with Q4 at 5 percent. On the assumption of a normal monsoon, CPI inflation is projected at 5.3 percent for 2023-24, with Q1 at 5 percent, Q2 at 5.4 percent, Q3 at 5.4 percent, and Q4 at 5.6 percent. The risks are evenly balanced. Headline inflation has moderated with negative momentum in November and December, 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 CPI headline inflation. Thus, monetary policy has to be tailored to ensuring a durable disinflation process. A rate hike of 25 basis points is therefore 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 of the inflation trajectory to effectively address the challenges to the economy. I now turn to the liquidity and financial market conditions. 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 global inflation dynamics, 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 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 basis points and the Cash Reserve Ratio by 50 basis points in an off-cycle meeting in May 2022. We shifted the policy stance to focus on withdrawal of accommodation. We continued the rate tightening cycle in every meeting of the MPC thereafter. And we adopted a nimble and flexible approach to liquidity management by conducting both variable rate reverse repo and variable rate repo operations as per requirement. As a result of all these measures, and this is very important, the real policy rate has been nudged into positive territory. The banking system has moved out of the chakra view of excess liquidity. Inflation has shown signs of moderation and is moderating, and economic growth continues to be resilient. 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 anticipated return of forex inflows are likely to augment systemic liquidity, it would get modulated by the scheduled redemption of the LTRO and TLTRO funds during February to April 2023. Under TLTRO and LTRO, you would recall, during the COVID times we had injected a lot of liquidity for periods ranging between one year to three years, and the last bit of that is coming back into RBI during February to April. 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. As part of our gradual move towards normalizing 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. Moreover, as part of our ongoing endeavor 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 program of the center and the states. The pace of transmission of monetary policy actions to both lending and deposit rates has strengthened in the current tightening cycle. The weighted average lending rate (WALR) on fresh rupee loans and outstanding rupee loans increased by 137 basis points and 80 basis points respectively during May to December. The weighted average domestic term deposit rate for fresh deposits and outstanding deposits increased by 213 and 75 basis points respectively. The Indian rupee has remained one of the least volatile currencies among its Asian peers in the 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 what it was 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. On this matter of volatility and depreciation, I have provided some comparison with other countries, with the Asian peers as I mentioned, and also I have given a comparison with the scenario which prevailed during the taper tantrum and during the global financial crisis. That is all contained in the footnote of my statement. Those of you who are interested may like to refer to it. I now turn my focus to the external sector. The current account deficit for the first half of 2022-23 stood at 3.3 percent 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 percent year-on-year 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 the first half of 2022-23 was around 26 percent, 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 is expected to remain in large surplus, partly offsetting the trade deficit. The current account deficit is expected to moderate in H2 of 2022-23 and remain eminently manageable and within the parameters of viability. On the financing side, net foreign direct investment (FDI) flows remain strong at 22.3 billion US dollars during April to December 2022. Foreign portfolio inflows have shown signs of improvement, with positive flows of 8.5 billion dollars during July to February, led by equity flows. It has to be recognized that if you take the full year, it is still negative, but the point I am making is that from July onwards, the foreign portfolio investments, the foreign portfolio flows, have picked up. Of course, it has seen a kind of up and down month on month, but overall from July onwards, it is a positive flow, a positive inflow of 8.5 billion between July to February 6th. Net inflows under non-resident deposits, and this is again important, increased to US dollar 3.6 billion during April-November 2022 from 2.6 billion a year ago, boosted by the Reserve Bank's July 6 measures to attract inflows into the country. Foreign exchange reserves have rebounded from 524.5 billion US dollars on October 21st, 2022 to US dollar 5.68 billion as on January 27th this year, that is January 27, 2023, and this covers around 9.4 months of projected imports of 2022-23. India's external debt ratios are low by international standards, and I have provided some data again to back the statement. When I am saying that India's external debt ratios are low by international standards, I have backed it up with data which is given in the footnote of my statement. I shall now announce certain additional measures. There are about five measures, and they are very important. I request your patience. The first one relates to penal interest or penal charges on loans. At present, regulated entities of the Reserve Bank are required to have a policy for levy of penal interest on advances. The regulated entities, however, follow divergent practices on levying of such charges. In certain cases, these charges are found 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. The next announcement relates to climate risk and sustainable finance. Recognizing 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 last year, that is July 2022. Based on the feedback received, it has been decided to issue guidelines for the regulated entities on: number one, a broad framework for acceptance of green deposits; two, a disclosure framework on climate-related financial risks; and three, guidance on climate scenario analysis and stress testing. These measures together will ensure that our financial system also starts developing resilience to withstand any possibility of vulnerability to climate change. I think these measures are quite timely. These are the first set of measures; there are a few other measures which will follow in due course, but for the time being, we are announcing these three measures. The next one relates to expansion of the scope of the TReDS platform. For the benefit of MSMEs, the Reserve Bank had introduced a framework in 2014 to facilitate financing of their trade receivables through the Trade Receivables Discounting System (TReDS). It is now proposed to expand the scope of TReDS by: first, providing an invoice financing facility; second, permitting all entities and institutions undertaking factoring business to participate as financiers in TReDS; and third, permitting rediscounting of invoices, that is developing a secondary market in TReDS. These measures are expected to improve the cash flows of the MSMEs. The next announcement relates to extending UPI for inbound travelers to India. UPI has become hugely popular for retail digital payments in India. It is now proposed to permit all inbound travelers 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 travelers from G20 countries arriving at select international airports. This is to begin with; going forward, obviously it will be expanded based on our experience. The last announcement relates to QR code-based coin vending machine and launching of a pilot project. The Reserve Bank of India will launch a pilot project on QR code-based coin vending machine in 12 cities. These vending machines will dispense coins against debit to customers' account using UPI instead of physical tendering of bank notes. This will enhance the ease of access to coins. Based on the learnings from the pilot, guidelines will be issued to banks to promote distribution of coins using these machines. I would now like to conclude as follows. As we begin a new year, and we have just started the calendar year, we are going to soon start a new financial year. As we begin a new year, it's 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, enabling policy environment, strong macroeconomic fundamentals, and buffers to deal with future challenges. I am reminded here of the words of Netaji Subhas Chandra Bose: 'Never lose your faith in the destiny of India.' Thank you. Namaskar.