Tag: RBi policy

RBI’s August policy: Sweet, Karam, Coffee

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The popular Prime Video Tamil serial “Sweet, Karam, Coffee” seems the best way to describe Thursday’s monetary policy. For non Tamils, this title means life has somethings sweet, some karam (spicy foods) and some pleasant stimulants all of which are part of a typical Tamil breakfast or teatime tiffin.

Coming to the policy, it is easy to detect the sweets – the dovish elements: it was a no-surprises policy with the repo rate and the policy stance left unchanged as every poll and preview panel predicted. Even more the RBI upped the CPI forecasts for Q2 and Q3 this year, but kept the Q4 forecast unchanged at 5.2 percent, indicating they expect the vegetables-led food inflation to subside entirely by January’24. Indeed the yield of the benchmark 10-year government bond fell by one basis point after governor finished reading the policy statement, indicating the market found the policy more dovish or rather sweeter than expected.

However, as the RBI started serving more in the statement, one could detect at least two karam or spicy items. The two unexpected signs of hawkishness were:

1. The huge hike in cash reserve ratio for a portion of bank deposits, secured between May 19 and July 28 and

2. A surprisingly high 5.2 percent CPI forecast for April-June 2024

The CRR hike was more like biting into a chilly in a delicious paruppu (dal) wada. RBI’s rational is that liquidity with banks increased sharply due to the recall of Rs 2,000 notes. From May 19 (when the announcement of withdrawal of Rs 2000 notes was made) to July 28, deposits in the banking system had risen by around Rs 11 lakh crore; in the corresponding period last year, deposits had risen by only 2.5 lakh crore. This extra liquidity, RBI reasons ,can push down rates and be generally inflationary, especially given the supply side issues that have pushed up food inflation. It is this loose money that RBI is seeking to impound temporarily, by charging a 10 percent CRR on the incremental deposits since May 19.

It may noted that not all the increase in deposits came from the depositing of Rs 2000 notes. RBI data shows Rs 3.14 lakh crore of Rs 2,000 notes were returned, of which 88 percent or 2.76 lakh crore were deposited. A bulk of the rise in deposits was actually due to HDFC merging into HDFC Bank effective July1. Thus it appears RBI is withdrawing much more than to merely nullify the impact of the return of Rs 2000 notes. That’s why it is important to see this as a hawkish step.

The other karam or hawkish note is struck by the FY25 Q1 CPI forecast at 5.2 percent. The RBI Monetary Policy report of April 2023 had forecast average CPI in FY25 at 4.5 percent and CPI in Q4FY25 ending at 4.4 percent. The fan chart indicated RBI was expecting the Q1 FY25 CPI at around 4.5/4.6 percent. Why has RBI then upped the forecast, to 5.2 percent?

Part of the reason can be the lower base – inflation fell to 4.6 percent in April-June 2023. But even discounting for this, RBI seems to be pencilling in a higher than normal momentum to get a 5.2 percent CPI for April-June 2024.

One reason could be that the RBI expects a jump in revenue expenditure by the Central government ahead of the general elections in April 2024. They probably reckon there could be populist programs of income transfers to the bottom of the pyramid which can be inflationary. It is also possible the RBI is forecasting a higher than expected inflation for April-June 2024 merely to dissuade the market from running away with rate cut expectations in April 2024. This is certainly an important karam (hawkish) dish in the policy.

The CRR hike actually raises more hawkish doubts in the minds of some. Will it be withdrawn on September 8, which is the date on which the RBI says it will review the ICRR or the incremental CRR. There is good reason to expect that since advance tax payment in mid-September and GST payments on Sept 20 will withdraw some of the liquidity from the banking system.

The festival season also starts with Ganesh Chaturti on September 19 and deposits are withdrawn in a big way during the festive season. Hence Sept 8 seems an opportune time to end the 10 percent CRR tax. But, if by then, RBI smells more inflationary pressures it may well keep the ICRR tool and only reduce the rate to may be 5 percent. All told, this is a lingering hawkish doubt: when will RBI abolish the ICRR? Not surprising bank stocks were downbeat after the policy on Thursday.

Repo rate and CRR hikes (the main tiffin) apart, the RBI had a dose of lovely south Indian filter coffee, by way of regulatory and development policies:

1. First is a welcome support for the home loan borrower: the RBI has warned banks from elongating the home loan repayment tenor too far out, when rates rise. Increasing the number of EMIs to be paid, means the customer ends up paying more. Also this practice can lead to camouflaging potentially stressed loans. Banks, in their zest to keep EMIs low and stable, may push repayment period beyond the working life of the home buyer.

2. Secondly, RBI has gone on to embellish the UPI or the Unified Payments Interface. The central Bank will soon launch “conversational payments” on UPI, which will be an AI product that can handhold customers in remote areas to learn net banking.

3. Third, the RBI has also announced that it is building a public-tech platform, that will digitalise a product like Kisan Credit Cards from start to finish. If successful, such a platform may enable banksto lend to lower and lower echlons. Now that’s a lot of stimulation for many bottom-of-the-pyramid households.

All told the policy seems a wholesome meal of sweet, karam, coffee.

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RBI announces new UPI features: From higher transaction limit for UPI Lite to payments via conversations

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Thursday announced three new features to enhance the digital payment experience in the country. In a bid to bring more convenience to users, the RBI proposed to increase the per transaction payment limit for UPI Lite in offline mode from Rs 200 to Rs 500. In addition, the central bank introduced Conversational Payments and Near Field Communication (NFC) technologies.

These developments by the RBI are expected to drive the growth of digital payments in India by providing users with more options, convenience, and accessibility while ensuring security and reliability.

Higher transaction limit for UPI Lite

RBI will increase the per transaction payment limit to Rs 500 for UPI Lite in offline mode. Presently, a limit of Rs 200 per transaction and an overall limit of Rs 2,000 per payment instrument has been prescribed by the Reserve Bank for small value digital payments in offline mode, including for National Common Mobility Card (NCMC) and UPI Lite.

According to Adelia Castelino, Co-Founder and Managing Director at In-Solutions Global, this is positive step towards accommodating a wider range of daily transactions and encouraging more users to adopt digital payments for their convenience.

Introduction of Conversational Payments

In addition to the increase in transaction limits, the RBI has introduced two new technologies to further improve the digital payment ecosystem. The first technology, known as ‘Conversational Payments,’ enables users to engage in conversations with AI-powered systems to initiate and complete transactions. This feature aims to enhance the ease of use for users who may find navigating mobile applications challenging or time-consuming. Initially available in Hindi and English, this feature will eventually be expanded to include more Indian languages.

Mandar Agashe, the Founder and MD of Sarvatra Technologies, highlighted how the increase in transaction limits and the introduction of Conversational Payments will enhance the accessibility and convenience of UPI transactions, especially for those who may not be tech-savvy.

Near Field Communication (NFC) technology

The second technology, Near Field Communication (NFC), is being introduced for offline payments through ‘UPI-Lite’ on-device wallet. This technology allows users to make payments even in areas with weak or no internet connectivity. By leveraging NFC technology, offline payments can be made securely and swiftly, addressing the limitations posed by internet availability.
Experts and industry leaders have praised these initiatives by the RBI.

Rahul Tandon, Chief Product Officer of Safexpay, emphasized that Conversational Payments will simplify the payment journey and open up opportunities for AI-driven engagement in the digital payment ecosystem. He also noted the significance of NFC technology for offline payments, ensuring seamless transactions even in areas with connectivity challenges.

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Kisan Credit Card scheme: Eligibility, interest rate, process to apply and more

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Thursday said a platform for frictionless credit delivery through digital process used in Kisan Credit Card (KCC) will be made available for other loans to deepen financial inclusion. This will bring efficiency in the lending process in terms of reduction of costs, quicker disbursement, and scalability.

KCC scheme helps farmers in purchasing agriculture products and services on credit at any time.

Here are the key things to know about the Kisan Credit Card (KCC) scheme:

Objective

The Kisan Credit Card scheme aims at providing adequate and timely credit support from the banking system under a single window with a flexible and simplified procedure to the farmers for their cultivation and other needs, according to the RBI statement.

Eligibility

Farmers—individual/joint borrowers who are owner cultivators, tenant farmers, oral lessees and share croppers; self-help groups (SHGs) or Joint Liability Groups (JLGs) of farmers including tenant farmers, share croppers etc can apply for KCC.

The borrower should be a minimum of 18 years of age and a maximum of 75 years. In the case of senior citizens, it is compulsory to have a co-borrower who is a legal heir.

Banks offerings

Many popular banks in India offer the Kisan Credit Card scheme such as the State Bank of India (SBI), HDFC Bank, ICICI Bank, Axis Bank, and Central Bank of India, among others.

Interest rate and charges

The interest rate on the KCC differs from one bank to another along with its credit limit. Other fees and charges such as processing fees, insurance premiums etc. are set at the discretion of the issuing bank.

(Source: Paisabazaar)

Repayment period

The repayment period may be fixed by banks as per the anticipated harvesting and marketing period for the crops for which the loan has been granted.

Normally, the term loan component is repayable within a period of 5 years depending on the type of activity/investment as per the existing guidelines applicable for investment credit, as per RBI norms.

Financing banks may, at their discretion, provide a longer repayment period for term loans depending on the type of investment.

Insurance

Eligible crops may be covered under ‘Pradhan Mantri Fasal Bima Yojna’ on premium payment. Borrowers should also opt for personal accident insurance and health insurance (wherever applicable).

Documents required

ID proof such as driving license/Aadhaar card/voter identity card, passport, etc is required. Also, proof of landholding duly certified by the revenue authorities, cropping pattern (crops grown) with acreage, security documents for loan limit, passport size photographs must be submitted.

Process to apply

Those looking to apply for KCC cards can apply online on the website of any bank that offers this facility. There should be a ‘Kisan Credit Card’ section under ‘Cards’. Applicants are required to fill out the PM Kisan Credit Card online application form with the required details and submit.

Those looking to apply it offline, can download the application form, visit the nearest bank branch that offers the ‘Kisan Credit Card’ scheme and submit the filled up form.

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RBI holds repo rate, but experts suggest this may be the best time to book your fixed deposits

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Thursday kept its key interest rates unchanged at 6.50 percent for the third straight monetary policy meeting. However, the overall rise in rates gives fixed deposit (FD) investors a favourable scenario, experts say. They recommend considering FDs with interest rates exceeding 7-8 percent, particularly for senior citizens who may earn an additional 0.50 basis points in interest compared to others.

The time frames of one to three years are touted as the most rewarding tenures for FD investments.

The RBI policy and fixed deposit rates

Before hitting the pause button for the third time on Thursday, August 10, the central bank had raised the repo rate cumulatively by 250 basis points since the beginning of the rate hike cycle in May 2022. Notably, the rates remained unchanged during both the April and June meetings this year.

A significant shift occurred even in fixed deposits as their interest rates began to rise when the RBI initiated repo rate hikes in May 2022. Over the subsequent 10 months, the central bank implemented a series of 2.5 percent repo rate increases until February 2023. The stability in interest rates is evident in the 10-year Government Security (G-Sec) yields, which have remained relatively steady between 6.9 percent and 7.2 percent since May this year.

During the period of RBI’s repo rate hikes, banks eventually followed suit in raising their FD rates, albeit with some lag. Banks that initially delayed raising their FD interest rates have since been increasing them to catch up, while those that acted swiftly have now begun to reduce them.

The current FD rates offered by lenders

(Source: Bankbazaar)

More FD rate hikes are unlikely

Experts believe that the trend of rising interest rates has nearly run its course and there are reports of some banks already reducing their interest rates.

The overall impact of the 2.5 percent repo rate hike has substantially affected FD rates between May 2022 and June 2023. Given this transmission, the likelihood of a significant surge in FD interest rates appears slim unless there is a fresh repo rate hike.

FD rates are influenced by several factors, including the repo rate, the gap between credit growth rates, deposit growth rates, and overall liquidity in the banking system.

Investment strategy

Financial experts assert that the current climate presents an opportune time to secure a desired fixed-income allocation through bank FDs.

“Over the past 15 months, average interest rates on rupee deposits with banks have exhibited a consistent upward trajectory. This trend is mirrored in bank FD rates, which have shown persistent increments despite occasional periods of pause. For consumers, this presents an advantageous window to secure the most favourable rates and consider reinvesting their deposits for higher returns, particularly within the 1-3 year timeframe,” said Adhil Shetty, CEO at BankBazaar.

Catch all updates on RBI policy here

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RBI revises regulatory framework for Infrastructure Debt Funds

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Thursday proposed new regulations governing infrastructure debt funds (IDFs). This revised framework aims to streamline and optimize the financing of infrastructure projects, RBI Governor Shaktikanta Das said while announcing the bi-monthly monetary policy,

One notable change is the withdrawal of the requirement for a sponsor for IDFs, which is expected to facilitate smoother operations and encourage increased participation. Additionally, IDFs will now have the permission to directly finance Toll Operate Transfer projects (ToT), marking a significant shift in their role and capacity. To enhance the financial capabilities of IDFs, the revised regulations grant them access to External Commercial Borrowings (ECBs), enabling them to tap into international sources of funding.

Moreover, the regulatory shift makes the tri-partite agreement optional for Public-Private Partnership (PPP) projects, offering greater flexibility in project execution.

Das expressed that these alterations are aimed at fostering a more robust role for IDFs in infrastructure financing. The move is part of a broader effort to harmonize regulations for different categories of Non-Banking Financial Companies (NBFCs), in alignment with the RBI’s regulatory objectives.

Highlighting the significance of these changes, Das pointed out that they are expected to augment the country’s infrastructure financing capacity. Since its establishment as a distinct category of NBFCs in 2011, the Infrastructure Debt Fund has evolved to play a pivotal role in funding crucial projects.

Governor Das also emphasized India’s rapid strides in digitalization, showcasing the embrace of digital public infrastructure. This embrace has nurtured an environment conducive to the growth of FinTech companies and startups, encouraging innovative solutions in various financial domains, including payments and credit.

This step is anticipated to usher in a new era of infrastructure financing, boosting economic growth and development in the country, experts say.

Catch all updates on RBI policy here

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RBI to enable borrowers to reset home loan rates whenever they want

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Thursday announced plans to establish a transparent framework for the resetting of interest rates on floating-rate loans. While making the bi-monthly monetary policy announcement, RBI Governor Shaktikanta Das revealed that the central bank will soon introduce a framework allowing borrowers to transition from floating interest rates to fixed interest rates.

This move aims to provide relief to individuals with home, auto, and other loans who have been grappling with the burden of high-interest rates. The proposed framework will primarily focus on enhancing communication with borrowers regarding any changes in loan schedules and adjustments to equated monthly instalments (EMIs).

According to Abhay Bhutada, MD at Poonawalla Fincorp, RBI’s decision will bring more transparency for reset of interest rates on floating interest loans, which will further reinforce consumer protection.

The current framework

The RBI introduced the external benchmarking system for home loans on October 1, 2019. Under this, all floating rate-based loans were required to be linked to an external benchmark. Initially, when the external benchmark system was introduced, the RBI allowed banks to reset the EMI once three months.

Currently, borrowers can switch between floating and fixed interest rates and vice versa. However, they may have to pay a conversion fee which can be anywhere between 0.50 percent to 2 percent of the home loan amount.

The proposal

In light of supervisory reviews conducted by the RBI and input received from the public, instances of lenders prolonging the tenor of floating-rate loans without proper consent and communication have been identified. To address this concern, the RBI intends to establish a comprehensive conduct framework that all regulated entities must adhere to. This framework aims to rectify the challenges faced by borrowers.

Governor Das said that the envisioned framework will require lenders to maintain clear communication channels with borrowers when it comes to resetting loan tenors and EMIs. It will also mandate the provision of options for switching to fixed-rate loans or prematurely closing loans. Additionally, the framework will emphasize transparent disclosure of associated charges and ensure that crucial information is effectively communicated to borrowers.

Das said that the framework will assess various options available to borrowers, including the possibility of switching to fixed-rate loans or opting for loan foreclosure. Additionally, the RBI will scrutinize the disclosure of charges related to these options and ensure that essential information is adequately conveyed to borrowers.

Understanding floating and fixed loan rates

The floating interest rate is volatile and keeps on changing as per the market scenario. This type of interest rate depends on the base rate offered by several lenders, so whenever the base rate changes, the interest rate gets automatically revised. This can be seen whenever RBI makes changes to its repo rate and the same is passed on to the borrowers.

On the other hand, people who opt for fixed home loan interest rates have to repay the home loan in fixed and equal instalments as per the loan tenure. The advantage of a fixed interest rate is that it would not change even if there are fluctuations or changes in the Indian financial market conditions or trends.

Here’s a comparison between fixed and floating home loan interest rates:

Catch all updates on RBI policy here

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RBI MPC Meet 2023 | Banks should park more money under cash reserve ratio to reduce liquidity: Shaktikanta Das

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Thursday said that banks should park more money under cash reserve ratio to reduce the liquidity in the system. While announcing the bi-monthly monetary policy, RBI Governor Shaktikanta Das said that central bank has imposed Incremental CRR (ICRR) of 10 percent on increase in NDTL (Net Demand and Time Liabilities) between May 19 – July 28. The banks will have to implement this from August 12.

RBI Governor said that the measure is temporary and aimed at mopping up excess liquidity due to return of Rs 2,000 notes. The Governor said during the press meet that 87 percent of Rs 2,000 notes have come back to the deposits of the bank.

The next review for this measure will be held on September 8, the Governor said. The existing CRR remains unchanged at 4.5 percent. Additional Cash Reserve Ratio (CRR) will be marginally negative for NIMs for banks.

The Governor said that one must remain watchful of emerging trends and the risks to price stability, adding that supply side intervention is critical to control inflation.

“The only positive point is that it is going to be reviewed soon on September 8,” SBI MD CS Setty said. “There will be some impact, we will have to assess what is the NDTL increase during the period which is mentioned. And then we will have to assess what is the impact. There would be slight impact. But since September 8 is also mentioned there, I think the pain is going to be lesser, I suppose. Hopefully the September 8 review will probably discontinue the incremental CRR,” he added.

Madhavi Arora of Emkay said that all banks having to maintain the incremental CRR could be construed as unfair to some banks who did not benefit much from the withdrawal of Rs 2,000 notes. She alluded to the fact that some PSU Banks benefitted more from the liquidity glut.

“Notably, ICICI, HDFCB, Axis amongst banks have maintained strong contingent buffer amongst banks (0.7-1.2%) and thus should not have any impact,” she added.

“The CRR hike would temporarily drain out liquidity close to Rs 70,000 crore. The systemic liquidity would still be in surplus. Consequently the impact would be largely neutral for banks. This in fact would be positive for NBFCs as the short/term interest rate would be lower than what was being anticipated earlier,” Sujan Hajra, Chief Economist at Anand Rathi said.

Post this announcement, the Nifty Bank cooled off over 500 points from the day’s high, even briefly slipping below the 44,500 mark, which has been a key support level. The index has now recovered 200 points from the day’s low as well, currently trading 0.5 percent lower at 44,659.

The top losers on the Nifty Bank index are ICICI Bank and HDFC Bank, which are contributing 92.4 points and 79.1 points to the downside respectively.

(With Inputs From Abhishek Kothari.)

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Bottom for home loan rates falling: Are good days ahead for borrowers?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The country has seen a steady increase in home loan interest rates and this has sent ripples through the real estate market and left borrowers pondering over their options. The rates were increased in response to the Reserve Bank of India’s (RBI’s) repo rate rise due to inflationary pressures and an evolving global economic landscape. Repo rate is the rate at which RBI lends money to commercial banks or financial institutions.

However, it is important to note that the bottom for home loan rates now has fallen.

“We had gone from 6.50 percent to 9.00 percent rapidly and now we’re at 8.40 percent while the repo is at 6.50 percent. The lowest spread has fallen to 1.90 percent for the eligible borrower,” Pankaj Bansal, Chief Business Officer (CBO) at BankBazaar.com, told CNBC-TV18.com.

Home loan rates trajectory

Most banks were going slow with hikes to marginal cost-based lending rates (MCLR) and hadn’t changed their MCLR rates along with the repo rate hikes. MCLR is the minimum rate a bank needs to charge for a loan.

“As per RBI’s reports, as of March 31, 2023, interest rates went up by only 1.35 percent on most old home loans based on the 1-year MCLR regime compared to home loans on External Benchmarks Lending Rate (EBLR), which have seen the entire rate hike of 2.5 percent passed on to them,” Bansal said.

EBLR ensures better transmission of policy rate changes. In case of a repo rate cut, banks have to pass on the entire benefit to borrowers.

Even the weighted average lending rate of new EBLR loans was twice as much as that of existing MCLR loans. This means that a borrower who had their rates reset last October or December has a much lower interest rate.

The current scenario

Now that the rate hikes have stabilised, the MCLR rates are also being rationalised. Notably, recently rates have been hiked for MCLR primarily and not the Repo Linked Lending Rates or EBLRs.

HDFC Bank on Monday raised MCLR by 15 bps. ICICI Bank, Punjab National Bank and Bank of India even revised their MCLR on loans across tenures.

“Banks have increased their MCLR to account for their increased cost of funding caused by higher deposit rates. Note that banks stopped linking their floating rate home loans to MCLR ever since the introduction of EBLR in October 2019. Thus, the MCLR increase would only impact those having existing home loans linked to MCLR, from their rate reset dates,” said Ratan Chaudhary, Business Head, of Home Loans at Paisabazaar.

To understand, such MCLR increases would not impact home loan rates offered to fresh home loan borrowers or those seeking to transfer their home loans to other banks at lower interest rates.

MCLR vs EBLR

Base rate and MCLR loans form a huge chunk of outstanding loans at 48.5 percent in March whereas EBLR loans are nearly 50 percent. The dependence on non-EBLR loans is seen more in government banks (64 percent of outstanding loans), whereas, in private banks, EBLR loans are now at 73 percent, Bansal said.

Notably, banks stopped linking their floating rate home loans to MCLR ever since the introduction of EBLR.

Borrowers strategy

Experts advise potential buyers to exercise prudence and not solely base their decision on the current interest rate environment. Long-term financial planning and considerations should take precedence, as rates can eventually fluctuate based on economic shifts.

“If borrowers want a greater degree of certainty in their rate movements, they should refinance to EBLR loans without delay,” Chaudhary said.

Additionally, they should check if the home loan balance transfer offers are available on their credit profiles. Existing home loan borrowers, especially those who have witnessed significant improvements in their credit profile after availing of the original loan, may be eligible for availing of home loans from other lenders at much lower interest rates.

On top of these, current borrowers should review their existing home loan agreements, understanding the terms and conditions. If possible, they could consider refinancing options that may offer better interest rates or favourable terms. Also, they can see whether switching from a floating rate to a fixed interest rate is a feasible option. Fixed rates can provide stability in uncertain times, but borrowers should weigh the potential costs against the benefits.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

RBI Monetary Policy | 100% expect MPC to hold fire as per CNBC-TV18 poll

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India’s Monetary Policy Committee (MPC) is holding a three-day meeting at a time when the nation is grappling with contrasting economic indicators. Market participants are eagerly awaiting the committee’s decision, with a unanimous ‘status quo‘ expectation dominating the sentiment, as indicated by a recent CNBC-TV18 poll.

Despite the ongoing turmoil in global economic waters, there is an air of cautious optimism surrounding the Indian economy. The recent surge in vegetable prices, a matter of concern for households across the country, has been accompanied by a moderation in fuel and core inflation.

This unique blend of factors has given rise to a perplexing scenario, presenting the Reserve Bank of India (RBI) with a formidable challenge — how to chart a course amidst these contradictory signals?

The anticipation among market experts is palpable, with every respondent in the CNBC-TV18 poll predicting that the RBI’s MPC will opt to prolong the ongoing policy pause, keeping the repo rates untouched at 6.5 percent.

This resounding consensus further underscores the belief that the Indian financial landscape is unlikely to witness any further rate hikes throughout the remainder of the current financial year.

While the financial markets appear to have settled into this status quo, projections for the coming year paint an interesting picture. The prevailing sentiment suggests that the earliest rate cut might occur within the April to June quarter of the following financial year (FY25).

A significant 60 percent of respondents in the poll support this notion, with a few even speculating that the rate cut could manifest in the quarter immediately preceding or succeeding the expected timeframe.

Beyond the rates themselves, the stance of the monetary policy is another area of intense scrutiny. Having persisted with a withdrawal of accommodation for over a year, market dynamics are aligned in anticipation of a consistent policy stance, with expectations firmly placed on the status quo prevailing in this current policy review.

The spectre of inflation, however, looms large and continues to be a key concern for policymakers. The recent spike in food prices is expected to exert upward pressure on consumer inflation figures for the months ahead.

As a result, the previously projected Consumer Price Index (CPI) inflation forecast of 5.1 percent for the full year is likely to experience a marginal revision, hovering within the range of 5.2 to 5.5 percent.

While inflationary forces wrestle for dominance, the outlook for economic growth remains comparatively stable. Forecasts for the year indicate that the RBI is likely to uphold its growth projections at 6.5 percent, maintaining a degree of consistency amid the turbulence of inflationary pressures.

For more details, watch the accompanying video

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Expect a hawkish RBI in the upcoming monetary policy

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The upcoming monetary policy on Thursday, August 10, is widely expected to be a status quo policy, with the Reserve Bank of India (RBI) changing neither the repo rate nor its stance. Markets and businesses will closely watch the governor’s overall tone, and it is anticipated that a hawkish stance will be favoured. Here’s why:

Firstly, food inflation is likely to push the overall CPI or consumer inflation to over 6 percent for July and possibly for August as well. It’s not just tomatoes; the soaring prices of tomatoes have affected the entire vegetable basket in the CPI.

In June, vegetable inflation stood at 12 percent. Furthermore, this inflationary pressure has spilt over into pulses (10.53 percent) and eggs (7 percent). When vegetables become unaffordable, people tend to opt for other protein foods, leading to higher prices in items like milk, which has already seen inflation rates between 8-10 percent since January 2023. According to a CNBC-TV18 poll, July food inflation is expected to rise to 9 percent from 4.54 percent in June.

This food inflation may not ease easily. Despite a surprisingly good spell of rain in July, El Nino has set in, according to weather experts. The government fears that only short-maturity rice varieties may be sown in rain-deficient southern states and over-flooded Punjab fields, impacting yields. As a knee-jerk response, non-basmati rice exports have been banned.

The winter-sown wheat crop is also expected to be affected, as El Nino is likely to keep rains deficient from August onwards. This could lead to a fall in groundwater and reservoir levels, impacting all rabi crops, especially wheat. Moreover, El Nino could also affect palm oil output in Indonesia, pushing up edible oil prices, the only item in the food CPI that currently remains 18 percent below year-ago levels.

In summary, food inflation may be prolonged, and even when the tomato crop is harvested in early winter, food inflation may remain elevated.

The primary counter to food inflation is expected to come from core inflation, and here’s where a shock may lurk.

Economists and the RBI are relying on the continuous fall in commodity prices, reflected in India’s declining wholesale price index (WPI). In June, WPI showed a reading of -4.12 percent. However, there are fears that the stronger-than-expected growth in the US.and India could disrupt this decline in commodity inflation.

The US GDP has exceeded expectations for the first two quarters of 2023, with growth rates of 2 percent for January-March (versus the expected 1.3 percent) and 2.4% for April-June (versus the expected 1.8 percent). Robust jobs data, with a ratio of jobs available to employed persons at 1.6, adds to concerns that goods inflation may resurface.

While goods inflation has softened, services and rent inflation remain the pain points. Furthermore, crude oil prices have bottomed out at $75/barrel and are now approaching $86. China’s indications of strong and continued monetary stimulus may reduce the disinflationary impact that the country had been having.

Although India’s growth numbers are mixed, they still lean towards being stronger than expected. For instance, the January-March GDP came in at 6.1 percent versus an expected 5.1 percent. Additionally, gross direct tax collections have been growing at 14.7 percent (as of July 9), and direct taxes, net of refunds, have grown by 15.87 percent, significantly above the 11 percent nominal GDP growth forecast by the budget for FY24.

The core sector growth in June was at 8.2 percent and the July purchasing managers’ index (PMI) numbers were also robust, with the Services PMI for July reaching a 13-year high of 62.3.

Rural demand has been tepid, as evident from the poor July auto sales numbers, especially for domestic two-wheelers, which recorded a decline of around 15 percent. However, a larger number of indicators show stronger growth, raising concerns that vegetable and food inflation could become more generalized.

Additionally, fiscal overspending could add to the RBI’s worries, as pre-election populist programs aimed at increasing incomes for rural and bottom-of-the-pyramid households cannot be ruled out during the second half of FY24.

All in all, it is more likely than not that the RBI governor will adopt an ultra-cautious (read hawkish) stance on August 10.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow