The global economy in 2023 has experienced a dramatic shift, with renewed turbulence and headwinds from the banking sector turmoil. Inflation remains a concern as central banks tighten monetary policy. This article will analyze the recent statements from the RBI Governor, the decisions and deliberations of the Monetary Policy Committee (MPC), and the assessment of growth and inflation.
Unprecedented Uncertainty in Geopolitics and Financial Markets
Former US Federal Reserve Chairman Alan Greenspan once said that uncertainty is the defining characteristic of the monetary policy landscape. In 2023, the world is experiencing unprecedented uncertainty in geopolitics, economic activity, price pressures, and financial markets. Central banks and policymakers face enormous challenges in navigating these turbulent times.
Monetary Policy Committee’s Decisions and Deliberations
The MPC met in April 2023 to assess the macroeconomic situation and its outlook. They unanimously decided to keep the policy repo rate unchanged at 6.50%, with the standing deposit facility (SDF) rate at 6.25% and the marginal standing facility (MSF) rate and Bank Rate at 6.75%. The MPC emphasized that the decision to pause on the repo rate is for this meeting only.
Rationale for MPC’s Decisions
While recent high-frequency indicators suggest some improvement in global economic activity, the outlook is tempered by additional downside risks from financial stability concerns. Headline inflation is moderating but remains above central banks’ targets. These developments have led to heightened volatility in global financial markets.
Indian Financial Sector’s Resilience
Despite global volatility, the banking and non-banking financial service sectors in India remain healthy, with economic activity resilient and real GDP growth expected to be 7.0% in 2022-23. However, consumer price inflation has increased since December 2022, driven by price pressures in cereals, milk, and fruits. Core inflation remains elevated.
Growth and Inflation Assessment
India’s real GDP is expected to have recorded a growth of 7.0% in 2022-23. Rabi foodgrains production is estimated to increase by 6.2% in 2022-23, and PMI manufacturing and services sectors show robust expansion. Aggregate demand conditions were resilient in Q4 of 2022-23, and investment activity exhibited buoyancy.
Headline inflation is projected to moderate in 2023-24. The MPC decided to keep the policy rate unchanged to assess the progress made so far while closely monitoring the evolving inflation outlook. They will not hesitate to take further action as required in future meetings.
Real GDP Growth Projection for 2023-24
Considering factors such as higher rabi production, steady growth in contact-intensive services, government focus on capital expenditure, and moderating commodity prices, real GDP growth for 2023-24 is projected at 6.5%. However, protracted geopolitical tensions and global financial market volatility pose downside risks to the outlook.
Inflation Trends and Projections
Temporary Softening in Inflation
The Reserve Bank of India (RBI) observed a transitory softening in inflation during November-December 2022, with Consumer Price Index (CPI) headline inflation breaching the upper tolerance threshold during January-February 2023. The primary cause for this uptick was a sharp turnaround in food inflation, while core inflation remained elevated across various goods and services.
Future Inflation Outlook
RBI projects CPI inflation to moderate to 5.2% for 2023-24, with risks evenly balanced. Factors influencing this projection include the expectation of a record rabi harvest, recent supply-side interventions by the Government, and moderating global commodity prices. However, potential risks such as adverse climatic conditions, firm milk prices, and uncertainties in international financial markets warrant close monitoring.
Financial Stability and Supervisory Measures
Global Financial Stability Challenges
The global economy faces financial stability challenges due to recent banking sector developments in some advanced economies. Regulators and regulated institutions must work together to safeguard financial system stability by proactively identifying vulnerabilities and exercising due diligence in risk management and corporate governance practices.
Strengthening Supervisory Systems in India
RBI has significantly strengthened supervisory systems for commercial banks, non-banking financial companies (NBFCs), and urban cooperative banks (UCBs). The focus is now on identifying root causes of vulnerabilities rather than just addressing symptoms. As a result, the Indian banking system remains sound and healthy, with strong capital and liquidity positions, improving asset quality, and better provisioning coverage.
Liquidity and Financial Market Conditions
RBI will continue to adopt a nuanced and agile approach to liquidity management, ensuring the completion of the Government borrowing programme in a non-disruptive manner while maintaining orderly market conditions during 2023-24.
External Sector Performance
The current account deficit (CAD) for the first three quarters of 2022-23 stood at 2.7% of GDP, with significant narrowing to 2.2% in Q3. The CAD is expected to remain moderate in Q4:2022-23 and in the year 2023-24, ensuring manageable levels.
Developing an Onshore Non-Deliverable Derivative Market
Banks with IFSC Banking Units (IBUs) will be permitted to offer non-deliverable foreign exchange derivative contracts (NDDCs) involving INR to resident users in the onshore market, further deepening the forex market in India.
Enhancing Efficiency of Regulatory Processes
A secured web-based centralized portal named ‘PRAVAAH’ (Platform for Regulatory Application, Validation And AutHorisation) will be introduced to simplify and streamline regulatory processes for entities seeking license, authorization, or regulatory approvals from RBI.
Centralized Web Portal for Unclaimed Deposits
A web portal will be developed to enable depositors or beneficiaries of unclaimed bank deposits of 10 years or more to search across multiple banks for possible unclaimed deposits.
Grievance Redress Mechanism for Credit Information Reporting
Measures to enhance consumer protection related to credit information reporting include a compensation mechanism for delayed updation/rectification, SMS/email alerts to customers, a timeframe for data inclusion, and disclosures on customer complaints received by Credit Information Companies (CICs).
Expanding UPI to Pre-Sanctioned Credit Lines at Banks
The scope of the Unified Payments Interface (UPI) will be expanded to permit operation of pre-sanctioned credit lines at banks through UPI, further encouraging innovation.
India’s financial sector remains resilient and stable amid global uncertainties. The RBI remains vigilant and ready to face challenges