The six-member monetary policy committee (MPC), consisting of three Reserve Bank of India (RBI) and three external members, kept the repo rate (INREPO=ECI) unchanged at 6.50% in line with the unanimous consensus in a Reuters poll.

The vote on the repo rate decision was also unanimous.

Commentary

Yuvika Singhal, Economist, Quanteco Research, New Delhi Covert In Small Letter

“While Guv (RBI Governor) acknowledged upside risks to the food inflation outlook with pockets of price pressures persisting within some of the key categories, near-term price pressures are likely to be ‘looked-through’.”

“We expect the RBI to be on a prolonged pause, in a bid for headline inflation to align gradually with the 4.0% target. As such, we look at RBI to begin its rate easing cycle in the third quarter of FY25.”

Sakshi Gupta, Principal Economist, HDFC Bank, Gurugram

“The RBI is expected to keep the policy rate unchanged until the middle of 2024. Liquidity conditions are expected to remain tight in the near term.”

Teresa John, Lead Economist, Nirmal Bang, Mumbai

“We do not see much possibility of OMO (open market operations) sales by RBI, particularly with it highlighting the contraction of its balance sheet.”

“We expect a rate cut by June 2024 aligned with global policy easing and just ahead of the expected fall in inflation to 4% in the second quarter of FY25.”

Anuj Puri, Chairman, Anarock Group, Mumbai

“With the fundamentals of the Indian economy remaining strong and the recently announced GDP rates indicating positive outlook, the RBI once again decided to keep the repo rates unchanged. This is an extension of the festive bonanza that RBI gave to the homebuyers in its last policy announcement. It gives homebuyers yet another opportunity to make cost-optimized home purchases.”

Radhika Rao, senior economist, DBS Bank, Singapore

“Outside of autonomous drivers, the RBI is likely to continue to maintain tight liquidity conditions and undertake a targeted approach via macro-prudential measures to check excesses.”

“In concert with the overall emphasis on removing post-pandemic excesses, the RBI will also continue to taper its balance sheet.”

“Optimism over the growth outlook was reflected in the sharp upward revision in the GDP estimates.”

Suvodeep Rakshit, senior economist, Kotak Institutional Equities, Mumbai

“The policy avoided any surprises while retaining a hawkish tone in its communications, as expected. The revised FY2024 GDP growth estimate at 7% was as expected too.”

“We believe that inflation risks remain on the upside for at least next few months from food inflation. The good part is that growth remains resilient and core inflation remains under check.”

“We maintain our call for a prolonged pause on repo rate at 6.5% well into FY2025 while liquidity over the medium term will be aimed at being close to neutral.”

Manoranjan Sharma, chief economist, Infomerics Ratings, New Delhi

“This policy is entirely in conformity with our pre-policy expectations. In view of the evolving growth-inflation trade-off, the MPC took the right call in holding the rates steady.”

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank, Mumbai

“The MPC has retained focus on 4% inflation being the medium target, with monetary policy actions to ensure disinflationary trends ahead. We continue to expect prolonged pause by the MPC.”

The six-member monetary policy committee (MPC), consisting of three RBI and three external members, kept the repo rate (INREPO=ECI) unchanged at 6.50% in line with the unanimous consensus in a Reuters poll.

The vote on the repo rate decision was also unanimous.

The central bank raised its forecast for economic growth to 7% from 6.5% after stronger than expected growth in the July-September quarter.

“Growth has been resilient and robust, surprising everyone,” Reserve Bank of India (RBI) Governor Shaktikanta Das said.

But the central bank’s 4% medium term inflation target is still to be met, said Das. “Monetary policy will remain actively disinflationary.”

The MPC maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target while remaining supportive of economic growth.

The RBI had raised the repo rate by a total 250 basis points (bps) since May 2022 in efforts to cool surging inflation, which dropped to a four-month low of 4.87% in October, but is expected to remain above the RBI’s 4% medium-term target for some time.

The central bank projected consumer inflation at 5.4% for 2023-24, unchanged from its previous projection.

The outlook for inflation remains clouded by uncertain food prices, said Das, while adding that core inflation, which excludes volatile food and fuel prices, has broadly moderated.

The Indian rupee was little changed at 83.3425 to the dollar while equity markets kept their gains following no change to the policy rate and stance.

Benchmark bond yields rose two basis points to 7.2565% after the RBI’s stronger growth forecast and cautious remarks on inflation risks.

While credit growth is accelerating, banks and non bank finance companies (NBFCs) need to ensure lending to individual categories is “sustainable”, Das said at an event in Mumbai.

“All forms of exuberance must be avoided.”

Last week, the Reserve Bank of India (RBI) asked banks to set aside more capital against personal loans and lending via NBFCs on concerns that soaring demand for small-ticket consumer credit could lead to a build-up of risk.

The tightening of lending norms is expected to push up borrowing costs and dent consumer loan growth, which has been rising at nearly double the pace of overall bank credit.

“These measures are pre-emptive in nature; they are calibrated and targeted,” Das said on Wednesday.

Das also asked lenders to be watchful of a buildup of stress due to new lending models.

“Banks and NBFCs need to be careful in relying solely on pre-set algorithms” for taking lending decisions, he said.

The RBI last week did not tighten capital norms for home loans, vehicle loans and gold loans.

The central bank does not currently see signs of stress in housing or vehicle loans, the governor said on Wednesday.

However, he flagged risks that may emerge from the inter-connectedness between banks and NBFCs, and asked non-bank lenders to widen their sources of funding.

The governor also said that so-called micro lenders, some of which have high interest margins, must consider whether the loans are affordable for lower-income consumers.

“Though the interest rates are regulated, certain microfinance institutions (MFI) appear to be enjoying relatively higher net interest margins,” Das said.

“MFIs should ensure that the flexibility provided to them in setting interest rates is used judiciously.”

The Reserve Bank of India will likely set cut-off yields for the 10-year bonds in the 7.69%-7.72% band, according to a Reuters poll of 11 traders.

The incentives range from cash-backs to reward points, similar to those offered by the banks on credit and debit cards, they said.

The sources declined to be named as they were not authorised to speak to the media. The RBI did not respond to an email seeking comment.

The RBI started a pilot program for the e-rupee in December and is targeting a million transactions daily by year-end. But retail transactions are still tracking below the target, averaging around 25,000 a day, prompting the central bank’s push, the first of the three sources told Reuters.

The central bank also introduced new features, including linking the digital currency to India’s popular real-time payments system, Unified Payment Interface (UPI), to attract users, Reuters reported last month.

HDFC Bank, India’s largest private lender, has rolled out such offers to expand the scale of such transactions, said Parag Rao, country head for payments, liability products, consumer finance and marketing at the bank.

Rao did not identify the specific offers it is running.

Smaller private lenders Yes Bank and IDFC First Bank are offering reward points that can be encashed for travel bookings, mobile recharges and cashbacks via FastTag, a highway toll collection system, according to the second of the three sources.

Other banks, including ICICI Bank and Union Bank, are also expected to roll out similar incentives, according to two executives at the respective banks.

Such “time-bound promotional incentives,” for the CBDC are part of Yes Bank’s digital strategy, a spokesperson for the bank said in an emailed response.

Emails sent to the other banks were not answered.

The banks are funding the offers themselves, all three of the sources cited earlier said.

Globally, countries like Nigeria offer rewards like discounts on auto-rickshaw rides to spur adoption of their digital currency but with limited success.

The incentives are largely “short-term measures,” that will help drive volumes up temporarily, a senior banker at a private lender said. Banks, however, won’t keep offering such incentives for long unless there is a clear business proposition, this person added.

Savings accounts are low interest rate-bearing deposits offered by Indian banks, forming a third of their total deposits.

The Reserve Bank of India (RBI), which has increased the policy repo rate by 250 basis points to 6.50% in the last fiscal year, wants to ensure a more complete transmission of monetary policy, a source familiar with the central bank’s thinking said.

“A majority of interest rate transmission has transpired because of the external benchmark lending rate, but a small portion remains, as savings deposit rates are still low,” he said requesting anonymity, as he is not authorised to speak to the media.

Public sector banks offer interest rates between 2.70% to 4% on savings deposits, while large private banks offer rates between 3% to 4.50%.Savings deposits rate of banks vs RBI’s repo rate

The RBI has been nudging banks at meetings to raise savings deposit rates and may need to push them again if required, the same source said.

The RBI did not immediately respond to a Reuters’ email seeking comment.

“The operational cost and technological cost of maintaining a savings account is quite high. Even a 20 bps-25 bps increase would impact the entire book of lenders,” said a top official at a private sector bank, who also declined to be named because he was not authorised to speak to media.

“This could prove to be margin dilutive at this point,” he added.

The RBI said in its monetary policy report that while the increase in term deposit rates in the current tightening cycle has exceeded that in lending rates, savings deposit rates have remained almost unchanged.

“This has moderated the increase in the banks’ overall cost of funds and is mirrored in higher net interest margins,” it added.

Yes Bank (YESB.NS), Kotak Mahindra Bank (KTKM.NS) and IndusInd Bank (INBK.NS) are among lenders that have recently said they have no plans to raise savings deposit rates.

“In the current situation, monetary policy must remain actively disinflationary to ensure that ongoing disinflation process progresses smoothly,” Das said at an event in New Delhi.

India’s monetary policy committee kept interest rates unchanged at its meeting earlier this month but signalled that the bar to reduce interest rates is high.

“We need to see a sustained decline in inflation to reach 4% target,” said Das, adding that the central bank “stands ready to take whatever action needs to be taken.”

Alongside food prices, higher oil prices have also emerged as a risk to inflation.

Das said that increases in domestic motor fuel prices, which India’s oil marketing companies have still to announce, will matter more for inflation than global prices.

Commenting on the foreign exchange markets, Das said the central bank acts in the market to prevent excess volatility.

The RBI sold nearly $3.86 billion in August as the Indian rupee fell towards record lows.

Reserve Bank of India Governor Shaktikanta Das was referring to the U.S. Treasury Department’s regular foreign exchange report and similar research by the International Monetary Fund (IMF).

Das called on the United States and other countries and organizations to review their use of “labelling like watch lists,” underscoring that these comments were not directed solely at the Treasury.

“Emerging market economies will have to build reserves and central banks in emerging markets are required to intervene in the currency market from time to time to prevent excessive volatility,” Das said on the sidelines of the IMF and World Bank annual meeting in Marrakech.

“So therefore any labelling, any kind of labelling of currency interventions should not be a black and white story and you need to look at the nuances of it.”

(This story has been refiled to add the dropped word ‘bank’ in the headline)

The 10-year benchmark bond yield closed at 7.3412%, the highest level since March 23, after ending at 7.2140% in the previous session. The yield had risen to 7.3612% earlier in the day.

The yield posted its biggest single session rise since August 5, 2022, and jumped 13 basis points this week, biggest such rise since week ended May 6, 2022.

“Market was not expecting announcement of a blunt tool like open market sale of bonds, which led to a strong reaction and even from this point, we see more upside for bond yields, with the trading range also shifting upwards,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

The RBI kept its key repo rate unchanged for a fourth consecutive policy meeting on Friday, which was on expected lines, and said it plans to conduct open market sale of bonds though auctions to manage liquidity in the system.

The RBI has sold bonds worth 71 billion rupees ($853.65 million) via screen-based operations in four weeks to Sept. 22, to drain additional liquidity since it started phasing out the incremental cash reserve ratio.

The central bank, however, did not provide a calendar for the sales, and uncertainty over the timing will dominate sentiment and keep yields elevated, economists said.

Overall, traders said the monetary policy tilted towards the hawkish side, with the RBI stressing on meeting its inflation target of 4% after it maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target.

ANZ Research said the RBI has a clear proclivity to manage liquidity via various tools, and liquidity will remain its preferred way to manage upside inflation risk, rather than tinkering with the policy rate.

India’s benchmark bond yield jumped the most in 14 months on the central bank’s tough stance on inflation and its surprise comments that it was considering bond sales to sop up any excess funds in the financial system.

The country’s monetary policy committee (MPC) kept the repo rate (INREPO=ECI) unchanged at 6.50%, in a unanimous decision. Most economists polled by Reuters had expected it to keep rates steady.

It has raised rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.

“Monetary policy needs to remain actively disinflationary at the current juncture,” RBI Governor Shaktikanta Das told a press conference.

The RBI also maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target while remaining supportive of economic growth.

A move to a neutral policy stance can only be considered when inflation aligns with the target in a “durable” manner, Das said. Five of six committee members voted in favour of the stance.

The impact of past rate hikes is still to be fully felt across the economy, Das said.

Annual retail inflation eased to 6.83% in August, from a 15-month high of 7.44% in July, but remained well above the central bank’s 2%-6% comfort band. However, core inflation, excluding food and oil, dropped below 5%.

Sharp spikes in food prices have been the main driver of headline inflation as erratic weather hurts production of staples like vegetables, milk and cereals.

“While declining core inflation is a silver lining, the overall inflation outlook remains clouded,” said Das, citing the impact of patchy rains and volatile global food and energy prices.

The central bank kept its inflation forecast unchanged and sees it averaging 5.4% in the financial year 2023-24. It also kept its economic growth projection unchanged at 6.5% for the year, despite signs of slowing global growth.

“The good part is that growth remains resilient and core inflation remains under check,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities in Mumbai.

“We maintain our call for a prolonged pause on repo rate at 6.5% well into fiscal year 2024/25 while liquidity over the medium term will be aimed at being close to neutral.”

The central bank sees inflation falling to its 4% target only by the second quarter of next financial year, it said in a separate report published alongside the monetary policy review.

“I would like to emphatically reiterate that our inflation target is 4% and not 2-6%. Our aim is to align inflation to the target on a durable basis, while supporting growth,” Das saidReuters Graphics

High inflation has put the focus back on liquidity management amid the RBI’s reduced ability to keep hiking rates at the risk of hurting growth.

The central bank may consider open market sales of bonds via auctions to manage liquidity conditions in line with its inflation objectives, Das said, but added the regulator does not intend to provide a timeframe for such sales yet.

India’s banking system liquidity has been in deficit but could improve as government spending has yet to pick-up.Reuters Graphics

The 10-year benchmark bond yield jumped to its highest level in six months, after Das said the RBI could consider open market sales of bonds. The benchmark 2033 bond yield jumped to 7.3412%, against 7.2197% before the policy decision.

The Indian rupee weakened marginally following the decision, and was at 83.2350 to the U.S. dollar, while local shares also remained higher with the benchmark BSE index (.BSESN) up 0.40%.

Median forecasts in a recent Reuters poll showed analysts expect the RBI to keep the repo rate at 6.5% for the rest of this fiscal year, with the next move being a 25 bps cut before July.

But Das’ comments on Friday on price risks indicated thereis a significant risk that the RBI delays any loosening of monetary policy into the middle of next year, said Capital Economics in a note.

“That would be a lot later than many other emerging market central banks.”