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#RBIPolicy | Governor Shaktikanta Das announces #MPC rate decision and other measures. #BQLive
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00:00 To celebrate India's 77th Independence Day in a few days, I am happy to note that the
00:05 Indian economy is exuding enhanced strength and stability despite the massive shocks to
00:13 the global economy in recent years.
00:16 Our economy has continued to grow at a reasonable pace, becoming the fifth largest economy in
00:22 the world and contributing around 15% to global growth.
00:30 We have also made significant progress towards controlling inflation.
00:35 Our banks remain healthiest in more than a decade, with historically high levels of capital,
00:42 declining levels of non-performing assets and rising profitability.
00:49 Deficit balance sheets are robust, with lower leverage, improving debt servicing capacity
00:56 and strong profitability.
00:59 Lower current account deficit and ample capital flows have imparted strength to our external
01:05 sector.
01:07 The resultant accretion to foreign exchange reserves has provided a buffer against external
01:13 shocks.
01:14 Overall, India's strong macroeconomic fundamentals have laid the foundations for sustainable
01:21 growth.
01:23 In a moment like this, we need to continue with our efforts to maintain macro-financial
01:30 stability while pushing our growth frontier further.
01:35 India is uniquely placed to benefit from the ongoing transformational shifts in the global
01:42 economy in the wake of geopolitical realignments and technological innovations.
01:49 A large economy marching ahead with vast domestic demand, untapped resources and demographic
01:57 advantages, India can become the new growth engine for the world.
02:08 In this background, the Monetary Policy Committee met on 8th, 9th and 10th of August.
02:16 After detailed deliberation on all relevant aspects, the Monetary Policy Committee decided
02:22 unanimously to keep the policy repo rate unchanged at 6.5%.
02:31 It is 6.5%.
02:34 Consequently, the Standing Deposit Facility (SDF) rate remains at 6.25% and the Marginal
02:42 Standing Facility (MSF) rate and the Bank Rate stand at 6.75%.
02:51 The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal
02:58 of accommodation to ensure that inflation progressively aligns with the target while
03:05 supporting growth.
03:08 Let me now explain the MPC's rationale for these decisions on the policy rate and the
03:14 stands.
03:15 Headline inflation, after reaching a low of 4.3% in May 2023, rose in June and is expected
03:25 to surge during July-August, led by vegetable prices.
03:31 While the vegetable price shock may reverse quickly, possible El Nino weather conditions
03:37 along with global food prices need to be watched closely against the backdrop of a skewed southwest
03:45 monsoon so far.
03:47 These developments warrant a heightened visual on the evolving inflation trajectory.
03:54 The cumulative rate hike of 250 basis points undertaken by the MPC so far is working its
04:02 way into the economy.
04:05 Nevertheless, domestic economic activity is holding up well and is likely to retain its
04:11 momentum despite weak external demand.
04:16 Considering this confluence of factors, the MPC decided to remain watchful and evaluate
04:22 the emerging situation.
04:26 Consequently, the MPC decided to keep the policy repo rate unchanged at 6.5% with preparedness
04:35 to act should the situation so warrant.
04:40 The MPC remains resolute in its commitment to align inflation to the 4% target and anchoring
04:48 of inflation expectations.
04:51 Further, with monetary transmission still underway and headline inflation remaining
05:17 higher than the 4% target, the MPC decided to remain focused on withdrawal of accommodation
05:23 to ensure that inflation progressively aligns with the target while supporting growth.
05:30 I would now like to provide our assessment of the growth and inflation scenario.
05:35 First, I would like to take up global growth.
05:39 The global economy continues to face daunting challenges of elevated inflation, high levels
05:45 of debt, tight and volatile financial conditions, continuing geopolitical tensions, fragmentations
05:54 and extreme weather conditions.
05:58 Belying earlier apprehensions, a number of economies have demonstrated remarkable resilience
06:04 and the grim prospects of hard landing appear to have receded.
06:09 Nevertheless, global growth is likely to remain low by historical standards in the current
06:16 year and also in the next few years, despite upward revision in the global growth forecast
06:25 for 2023 by the IMF.
06:30 World merchandise trade volume growth is projected by the WTO to decelerate from 2.7% in 2022
06:39 to 1.7% in 2023.
06:45 Headline inflation is easing unevenly across countries and remains above the target in
06:51 major economies.
06:54 While the pace of monetary tightening has been scaled down, policy rates could stay
07:00 higher for longer.
07:02 Financial markets, which had been buoyed by expectations of an early end to the cycle
07:08 of monetary tightening, have turned volatile with sizable two-way movements in response
07:15 to recent rating events and incoming data.
07:19 Turning to global growth, these external factors are likely to impinge on the growth prospects
07:27 of most advanced and emerging economies.
07:31 India is, however, expected to withstand these external headwinds far better than many
07:38 other countries.
07:40 The momentum of overall economic activity in India continues to be positive.
07:46 On the supply side, crop sowing has picked up with steady progress in the southwest monsoon.
07:53 The temporal and spatial distribution of monsoon has, however, been uneven.
08:00 Industrial activity is holding ground, as is evident from the latest data on Index of
08:06 Industrial Production, that is IIP, Core Industries Output and Purchasing Managers
08:11 Index, that is PMI, for manufacturing.
08:16 Buoyant services activity is reflected in healthy expansion in e-way bills, toll collections,
08:24 railway freight and a sharp jump in services PMI.
08:30 On the other hand, commercial vehicle sales and domestic air cargo traffic contracted
08:35 during Q1 of the current financial year.
08:40 Aggregate demand conditions continue to be buoyant.
08:44 Among urban demand indicators, domestic air passenger traffic, passenger vehicle sales
08:50 and household credit are exhibiting sustained growth.
08:55 In the case of rural demand, tractor and fertilizer sales improved in June, while two-wheeler
09:01 sales moderated.
09:03 High growth in agricultural credit and improving sales volume of major fast-moving consumer
09:09 goods, that is FMCG companies, suggest incipient recovery in rural demand, which will be reinforced
09:17 by improving Kharif prospects.
09:21 So what I have done under growth is that first I highlighted about the supply conditions,
09:25 the supply side factors, then I have highlighted the aggregate demand conditions consisting
09:30 of both rural and urban demand, and let me now turn to investment activity.
09:36 Investment activity gained further steam on the back of government capital expenditure,
09:42 rising business optimism and revival in private capex in certain key sectors.
09:49 Continued increase in import and production of capital goods further reaffirms this trend.
09:56 Construction activity also remains strong in first quarter of this year as indicated
10:02 by healthy growth in cement production and steel consumption.
10:08 Energy utilization in the manufacturing sector at 76.3% remained above the long-term average
10:19 of 73.7%.
10:23 The total flow of resources to the commercial sector from banks and other sources taken
10:31 together has increased by Rs. 7.5 lakh crore during the financial year 2023-24 so far,
10:43 that is up to July 28, as compared with 5.7 lakh crore a year ago.
10:50 So just to repeat the figures, the flow of resources to the commercial sector in the
10:56 current year so far is 7.5 lakh crore, and in the corresponding period of last year it
11:02 was 5.7 lakh crore.
11:06 On the downside, however, merchandise exports and non-oil, non-gold imports contracted further
11:12 in June, and the growth in services exports decelerated amidst slowing external demand.
11:20 Going ahead, these underlying developments and the upcoming festival season are expected
11:26 to provide support to private consumption and investment activity.
11:32 The spillovers emanating from weak external demand and protracted geopolitical tensions,
11:38 however, pose risks to this outlook.
11:43 Taking all these factors into consideration, real GDP growth for 2023-24, that is for the
11:49 current year, is projected at 6.5%, with Q1 at 8%, Q2 at 6.5%, Q3 at 6%, and Q4 at 5.7%.
12:07 Real GDP growth for Q1 of next financial year, that is 2024-25, is projected at 6.6%.
12:17 The risks are evenly balanced.
12:20 Let me now turn to inflation.
12:22 The moderation in headline inflation to 4.6% in Q1 of 2023-24 was in line with the projections
12:31 set out in the June MPC meeting.
12:34 There was pickup in headline inflation to 4.8% in June due to an upturn in food inflation.
12:43 On the positive side, inflation excluding food and fuel, that is, core inflation, has
12:49 softened by more than 100 basis points from its recent peak in January 2023.
12:57 The month of July has witnessed accentuation of food inflation, primarily on account of
13:03 vegetables.
13:05 The spike in tomato prices and further increase in prices of cereals and pulses have contributed
13:13 to this.
13:14 Consequently, a substantial increase in headline inflation would occur in the near term.
13:22 Going by the past trends, vegetable prices may see a significant correction after a few
13:29 months.
13:30 The prospects of kharif crops have also brightened thanks to improvement in the progress of the
13:37 monsoon.
13:38 Uncertainties, however, remain on domestic food price outlook due to sudden weather events
13:44 and possible El Nino conditions in August and September.
13:54 Global food prices are also exhibiting a hardening bias on renewed geopolitical tensions.
14:01 Crude oil prices have firmed up in the recent weeks and its outlook is clouded by demand
14:07 supply uncertainties.
14:10 Assessment of the future trajectory of inflation is a continuous process.
14:16 We have a choice to modify our inflation projections in every meeting of the MPC if warranted,
14:24 in the interest of better guidance, or avoid frequent changes and revise them only on fewer
14:32 occasions for simplicity of presentation.
14:36 Given the continuing uncertainties, our latest CPI inflation projection for 2023-24, assuming
14:45 a normal monsoon, is revised to 5.4%, with Q2 at 6.2%, Q3 at 5.7% and Q4 at 5.2%.
15:03 Let me just repeat these numbers for better clarity.
15:07 CPI inflation projections for 2023-24, that is for the current year, assuming a normal
15:13 monsoon, as I have said, is revised to 5.4%, with Q2 at 6.2%, Q3 at 5.7% and Q4 at 5.2%.
15:28 Further, CPI inflation for Q1 of the next financial year, that is 2024-25, is projected
15:36 at 5.2%.
15:39 The risks are evenly balanced.
15:42 Headline inflation projection for Q2 of 2023-24, that is for the months of July, August and
15:50 September this year, has been revised up substantially, primarily due to price shock from vegetables.
15:59 Given the likely short-term nature of these shocks, monetary policy can look through high
16:06 inflation prints caused by such shocks for some time.
16:12 The frequent incidences of recurring food price shocks, however, pose a risk to anchoring
16:18 of inflation expectations which was underway and which has been underway since September
16:26 2022.
16:30 The role of continued and timely supply-side interventions assumes criticality in limiting
16:36 the severity and duration of such shocks.
16:41 In such circumstances, it is necessary to be watchful of the emerging trends and the
16:48 risks to price stability.
16:51 We have to stand in readiness to go beyond keeping Arjuna's eye to deploying policy
16:59 instruments, if necessary.
17:03 I reiterate what I said in the previous June policy statement.
17:10 Limiting headline inflation within the tolerance band is not enough.
17:15 We need to remain firmly focused on aligning inflation to the target of 4%.
17:23 With this, I would now like to take up the liquidity and financial market conditions.
17:29 The level of surplus liquidity in the system has gone up in the recent months on the back
17:34 of the return of Rs. 2,000 bank notes to the banking system, RBI surplus transfer to the
17:42 government, pick-up in government spending and capital inflows.
17:48 The overall daily absorption under the Liquidity Adjustment Facility that is LAF was Rs. 1.7
17:55 lakh crore in June and Rs. 1.8 lakh crore in July this year.
18:02 Despite such surplus liquidity, market response to RBI's 14-day variable rate repo auctions
18:09 that is VRRR auctions was lukewarm.
18:13 Instead, banks preferred to place their surplus liquidity in the less remunerative standing
18:20 deposit facility that is SDF.
18:23 Although the fine-tuning VRRR auctions of 1 to 4 days maturity during this period evoked
18:31 better response from the market, this essentially reflects greater risk aversion among the banks
18:52 to park large funds under the main operation.
18:56 In this context, it is necessary to reiterate that fine-tuning operations that is overnight
19:02 operations up to 13 days are undertaken to deal with special or exceptional situations
19:10 and cannot become a rule.
19:15 In recent years, our stated stance on liquidity is to maintain adequate liquidity in the system
19:21 to meet the productive requirements of the economy.
19:26 Surplus liquidity, on the other hand, can pose risks to price stability and also to
19:31 financial stability.
19:33 Hence, efficient liquidity management requires continuous assessment of the level of surplus
19:39 liquidity so that additional measures are undertaken as and when necessary to impound
19:47 the element of excess liquidity.
19:50 Accordingly, it has been decided that with effect from the fortnight beginning August
19:57 12, scheduled banks shall maintain, I repeat, scheduled banks shall maintain an incremental
20:06 cash reserve ratio that is ICRR of 10% on the increase in their net demand and time
20:15 liabilities that is NDTL between May 19 and July 28.
20:21 I would like to read this sentence again so that the message gets across.
20:27 It has been decided that with effect from 12th of August, scheduled banks shall maintain
20:34 an incremental CRR that is ICRR of 10% on increase in their NDTL between May 19 and
20:44 July 28.
20:47 And what I am now going to say is equally important.
20:50 This measure is intended to absorb the surplus liquidity generated by various factors referred
20:57 to earlier, including the return of Rs. 2000 notes to the banking system.
21:03 This is purely a temporary measure for managing the liquidity overhang.
21:11 Even after this temporary impounding, there will be adequate liquidity in the system to
21:18 meet the credit needs of the economy.
21:23 We have reviewed the position and on that basis alone, on the basis of our internal
21:27 assessment, I am making this statement that even after this temporary impounding, there
21:33 will be adequate liquidity in the system to meet the credit needs of the economy.
21:39 The incremental CRR will be reviewed on 8th September or earlier with a view to returning
21:47 the impounded funds to the banking system ahead of the festival season.
21:53 I must add that the existing cash reserve ratio that is CRR remains unchanged at 4.5%.
22:04 I would now like to focus on financial stability.
22:07 The Indian financial sector has been stable and resilient as reflected in sustained growth
22:13 in bank credit, low levels of non-performing assets and adequate capital and liquidity
22:21 buffers.
22:24 Stress tests for credit risk reveal that scheduled commercial banks would be able to comply with
22:31 the minimum capital requirements even under severe stress scenarios.
22:37 This is however, there is however, there is however, no room for complacency because it
22:43 is during tranquil and good times that vulnerabilities may creep in.
22:48 Hence, buffers are best built up during these periods.
22:53 A stable financial system is a prerequisite for price stability and sustained growth.
23:00 This is a shared responsibility in which regulated entities like banks, NBFCs and others are
23:08 important stakeholders.
23:10 On its part, the Reserve Bank remains steadfast in its commitment to safeguard the financial
23:21 system from the emerging and potential challenges.
23:25 We expect the same from the regulated entities also.
23:30 As regards the external sector, India's current account deficit was contained at 2% of GDP
23:37 in 2022-23 as compared with 1.2% in 2021-22.
23:46 Merchandise trade deficit has narrowed in the first quarter of the current financial
23:50 year that is 2023-24 with contraction in imports exceeding contraction in exports.
23:58 These exports and remittances are however, expected to provide cushion to the current
24:04 account deficit.
24:06 We therefore, expect the current account deficit to remain eminently manageable during the
24:11 current financial year also.
24:22 On the financing side, foreign portfolio investment i.e.
24:25 FPI flows have remained buoyant in 2023-24 i.e. in the current year so far.
24:33 Net FPI inflows have been US$20.1 billion up to August 8, which is the highest since
24:43 2014-15.
24:46 In the corresponding period of the previous year, there were net outflows of US$12.6 billion.
24:55 The inflows under external commercial borrowings also witnessed a turnaround with net inflows
25:02 of US$6 billion during April-June this year as against net outflows of US$2.9 billion
25:12 a year ago.
25:15 Net foreign direct investment i.e. net FDI flows to India on the other hand fell to US$5.5
25:22 billion during April-May 2023 from US$10.6 billion a year ago, reflecting a global slowdown
25:32 in FDI inflows or in FDI flows.
25:37 Latest available data suggest that India's external debt-to-GDP ratio improved to 18.9%
25:47 at the end of March 2023 from 20% at the end of March 2022.
25:57 The Indian rupee has remained stable since January 2023.
26:04 Foreign exchange reserves have crossed the mark of US$600 billion.
26:11 The umbrella has gathered strength and I am not saying this in the context of the monsoon
26:17 rains.
26:18 I would now like to proceed and announce certain additional measures.
26:23 As you would be aware, we announced several measures as a part of the MPC statement and
26:30 a number of these measures have very far-reaching consequences and they make a lot of impact
26:35 on our overall financial inclusion, on our financial, depending on credit, on the spread
26:43 of UPI and on other aspects of the economy.
26:47 So we have a few measures.
26:48 I request your continued patience.
26:51 The first announcement relates to review of regulatory framework for financial benchmark
26:57 administrators.
26:59 It has been decided to revise the extant regulations issued in June 2019 and put in place a comprehensive
27:07 risk-based framework for administration of financial benchmarks.
27:13 This will cover all benchmarks related to foreign exchange, interest rates, money markets
27:20 and government securities.
27:23 The revised directions will provide greater assurance about the accuracy and integrity
27:28 of the financial benchmarks.
27:31 The next announcement relates to review of regulatory framework for infrastructure debt
27:38 fund NBFCs, that is IDF NBFCs.
27:43 At present, infrastructure debt funds provide refinancing facilities for lenders in the
27:49 infrastructure sector.
27:51 The extant regulatory framework for IDFs has been revised.
27:57 The key changes in the revised framework are, one, withdrawal of the requirement to have
28:03 a sponsor for the IDFs; two, allowing IDFs to finance toll operator, toll operator transfer,
28:13 that is TOT projects as direct lenders; three, permitting IDFs to raise funds through ECBs;
28:22 and four, making tripartite agreements optional for PPP projects.
28:29 These changes are expected to further augment the capacity for infrastructure financing
28:35 in the country.
28:38 The next announcement relates to greater transparency in interest rate reset of equated monthly
28:45 installments based floating rate loans.
28:48 Now, let me just read it again.
28:50 I think that was too long.
28:52 Basically, the next announcement relates to bringing in greater transparency in interest
28:57 rate reset of EMI installment based floating interest loans.
29:05 It is proposed to put in place a transparent framework for reset of interest rates on floating
29:12 interest loans.
29:14 The framework will require regulated entities to, again there are various components, it
29:21 will require the regulated entities to, number one, clearly communicate with borrowers for
29:27 resetting the tenor and/or the EMI; number two, provide options for switching to fixed
29:35 rate loans or foreclosure of loans; three, disclose various charges incidental to the
29:42 exercise of the options; and four, ensure proper communication of key information to
29:50 the borrowers.
29:52 These measures will further strengthen consumer protection.
29:57 The next announcement relates to consolidation and harmonization of instructions for supervisory
30:03 data submission.
30:05 The Reserve Bank has from time to time issued several guidelines on submission of supervisory
30:12 returns by the supervised entities.
30:16 It has been decided to consolidate and harmonize such guidelines into a single master direction
30:23 to reduce compliance burden and to promote greater ease of doing business for supervised
30:29 entities.
30:31 And the next announcement, actually there are three announcements within this announcement
30:36 and it relates to UPI.
30:38 And basically, the announcements are related to, you know, bringing in conversational payments
30:45 and offline capacity on the UPI, enhancement in transaction limit of small value offline
30:52 digital payments.
30:54 The details are as follows.
30:56 With the objective of harnessing new technologies for enhancing the digital payments experience
31:01 for users, it is proposed to, number one, enable conversational payments on UPI, which
31:10 will enable the users to engage in conversation with artificial intelligence powered systems
31:17 to make payments.
31:19 Number two, introduce offline payments on UPI using near field communication technology
31:27 through UPI Lite on device wallet.
31:33 And number three, enhance the transaction limit for small value digital payments in
31:38 offline mode from Rs. 200 to Rs. 500 within the overall limit of Rs. 2000 per payment
31:46 instrument.
31:48 These initiatives will further deepen the reach and use of digital payments in the country.
31:55 And this is the final announcement, the next one, and it is really impactful.
32:01 We expect this announcement going forward will have a huge impact on our credit sector.
32:09 The Reserve Bank in association with the Reserve Bank Innovation Hub started a pilot project
32:15 in September last year for frictionless credit delivery through end-to-end digital processes
32:22 starting with Kisan Credit Card loans, that is KCC loans.
32:27 The pilot for KCC loans is currently operational in select districts of Madhya Pradesh, Tamil
32:35 Nadu, Karnataka, UP and Maharashtra.
32:40 Recently dairy loans have been included in the pilot project in select districts of Gujarat.
32:47 Based on the learnings from the pilots and to expand the scope of end-to-end digital
32:53 lending processes, a public tech platform for frictionless credit delivery, I repeat,
33:01 a public tech platform for frictionless credit delivery is being developed by the Reserve
33:08 Bank Innovation Hub.
33:10 The platform is intended to be rolled out as a pilot project in a calibrated manner.
33:17 It will have an open architecture and open application programming interface, that is
33:23 API and standards, to which all financial sector players can connect seamlessly.
33:31 This initiative will accelerate the penetration of credit to the hitherto underserved regions
33:40 and further deepen financial inclusion in our country.
33:44 Let me now conclude.
33:46 We have made good progress in sustaining India's growth momentum.
33:52 While inflation has moderated, the job is still not done.
33:58 Inflationary risks persist amidst volatile international food and energy prices, lingering
34:05 geopolitical tensions and weather-related uncertainties.
34:10 In charting the course of monetary policy, we continuously assess the impact of our past
34:16 actions, the evolving inflation dynamics and the implications of the incoming data for
34:24 the economic outlook.
34:26 I reiterate our commitment to align CPI inflation to the 4% target on a durable basis.
34:35 We do look through idiosyncratic shocks, but if such idiosyncrasies show signs of persistence,
34:44 we have to act.
34:46 As we prepare to celebrate the Independence Day, the air is filled with hope and promise.
34:53 Let me end by recalling the prophetic words of Mahatma Gandhi, and it is as follows.
35:00 "I have no doubt that our country would rise to the greatest height among the nations
35:07 of the world."
35:08 Thank you.
35:09 Namaskar.
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35:14 [MUSIC PLAYING]
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