RBI Governor Shaktikanta Das reported that Rs 1.8 lakh crore worth of Rs 2,000 notes had returned to the banking system, with 85% being deposited in bank accounts. The repo rate was maintained at 6.50%, and the central bank expects growth to be 6.5% in 2023-2024.
In a post-monetary policy news conference, RBI Governor Shaktikanta Das reported that thus far, around Rs 1.8 lakh crore worth of Rs 2,000 notes had returned to the banking system. As of March 31, 2023, there were almost half as many notes in circulation in value terms.
In accordance with our predictions, he continued, around 85% of Rs 2,000 notes are being deposited in bank accounts.
In order to further reduce inflationary pressures, the RBI kept things as they are and held its benchmark lending rate constant for a second consecutive policy meeting. However, it also gave the impression that tight monetary conditions will last for some time.
The repo rate was maintained at 6.50% by the monetary policy committee (MPC), which consists of three members from the Reserve Bank of India (RBI) and three external members.
Analysts do not anticipate India’s inflation to reach the RBI’s medium-term objective of 4% for at least another two years, despite reaching an 18-month low of 4.70% in April.
Governor Shaktikanta Das announced the MPC’s decision while stating that the RBI will sustain its strategy of “withdrawal of accommodation” to ensure that inflation gradually aspires to the objective set by the committee while continuing to promote growth.
“Our goal is to achieve the inflation target of 4% and keeping inflation within the comfort band of 2-6% is not enough,” Das stated.
The committee “will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring inflation down to the target,” the MPC’s resolution stated.
According to Das, the central bank expects growth to be 6.5% in 2023–2024 and retail inflation to be 5.1% on average.
“Domestic macroeconomic fundamentals are strengthening,” he declared.
“The RBI remains cautious on the inflation trajectory, especially as inflation will remain above the 4% target for the foreseeable future,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.
“We maintain our call that the RBI will be on an extended pause,” he added.
Das stated that despite excess liquidity in the banking sector, it will continue to be “nimble” with its liquidity operations despite overnight rate increases.
According to what the market anticipated, the MPC unanimously opted to maintain the Repo rate steady, and the policy of “withdrawal of accommodation” remained unaltered. Inflation is heading lower, Q4 FY’23 growth was robust, the trade deficit is closing, the budget deficit is under control, and demand and economic high frequency indicators are solid, according to the policy. In light of this, the central bank maintained its 6.5% forecast for GDP growth in FY24 while cutting its average inflation forecast to 5.1% (from 5.2%), according to Shanti Ekambaram, a full-time director at Kotak Mahindra Bank.
In conclusion, the RBI reaffirmed its “watchful stance” toward new risks, determination to uphold price stability, and provision of sufficient liquidity for economic expansion. All of this is taking place against a backdrop of robust economic expansion and low inflation. Rates are likely to stay on hold for some time until there is a significant change in inflation, GDP, or volatility throughout the world, Shanti continued.
All regulated companies, including cooperative lenders, would now be empowered to implement “compromise settlements and technical write-offs” to address non-performing assets under the RBI’s decision to expand the framework for the resolution of stressed assets, Guv added.
According to RBI Deputy Governor Michael Patra, the impending advance tax outflows are the reason why banks are reluctant to store money in our variable rate reverse repos.
One of the methods the central bank use to remove extra liquidity from the banking system is reverse repo operations. The money is returned to banks at the conclusion of a VRRR’s tenure.
