In its second bi-monthly monetary policy, the Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.5% in its recent monetary policy meeting. The central bank maintains its GDP growth forecast for FY24 at 6.5% and expects CPI inflation to be at 5.1%. The RBI has also revised the inflation forecast for the country, India's narrowing trade deficit, and the regulatory framework for digital banking. Additionally, the RBI has decided to allow the issuance of RuPay Prepaid Forex cards by banks, increasing their usage at overseas locations. 

Here are the key highlights from the RBI's Monetary Policy Report:

RBI Keeps Repo Rate Unchanged at 6.5% Amidst Global Uncertainties

The RBI's Monetary Policy Committee (MPC) maintains the repo rate at 6.5%. Repo rate is the rate at which commercial banks borrow money from the central bank of a country.

The apex bank also retains its forecast for GDP growth in FY24 at 6.5%, while anticipating CPI inflation to be at 5.1% for the same period.

“Based on an assessment of the macroeconomic situation and the outlook, the MPC decided unanimously to keep the policy repo rate unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent. The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth,” RBI Governor Dr Shaktikanta Das said in the Monetary Policy Statement.

Revised Inflation Forecast and Monetary Policy

The RBI has made a slight downward revision to its inflation forecast for 2023-24, reducing it by 10 basis points to 5.1%. Governor Shaktikanta Das stated that the risks to the inflation forecasts were evenly balanced. The MPC decided to keep the key policy rate unchanged at 6.5% for the second consecutive time.

The quarterly breakdown of the inflation forecast is as follows: a cut in CPI inflation forecast for April-June 2023 to 4.6% from 5.1%, a cut in CPI inflation forecast for July-September 2023 to 5.2% from 5.4%, a retained forecast of 5.4% for October-December 2023, and a retained forecast of 5.2% for January-March 2024.

The Reserve Bank of India's decision to maintain the repo rate and its focus on economic stability and digital innovation reflects its commitment to navigating global uncertainties and promoting the growth and resilience of the Indian economy.

Post Monetary Policy Press Conference by Shri Shaktikanta Das, RBI Governor- June 08, 2023 https://t.co/vGm4yceiee

— ReserveBankOfIndia (@RBI) June 8, 2023

Global Economic Challenges and Domestic Stability

Governor Shaktikanta Das highlights the relatively reduced uncertainty and clearer path ahead compared to previous years. However, he cautioned that geopolitical conflicts persist, and global policy normalization is still incomplete. 

In the Monetary Policy Statement, RBI Governor further said, "Unlike the previous three tumultuous years, the uncertainty on the horizon appears comparatively less and the path ahead somewhat clearer; but we have to be acutely aware that the geopolitical conflict continues unabated and policy normalisation globally is far from complete.

Headline inflation across countries is on a downward trajectory, but is still high and above the targets. Labour markets are tight, and demand is rotating back from goods to services. Hence, central banks across the world remain on high alert and watchful of the evolving conditions, even though many of them have tempered their rate hikes or taken a pause. Financial stability concerns persist in advanced economies, although they appear to have been contained due to resolute actions.

Retrenchment in trade, technology and capital flows caused by geopolitical fault lines and economic fragmentation further complicate the situation.” 

India’s Narrowing Trade Deficit 

The Monetary Policy Statement also highlights that in recent months, India's narrowing trade deficit is driven by a decline in imports compared to exports. To achieve its USD 1 trillion export target by 2030, India is diversifying markets, leveraging trade agreements, strengthening manufacturing, and implementing schemes like PLI.

RBI's Focus on Economic Stability and Financial Resources

The RBI has been diligently concentrating on preserving price and financial stability while ensuring the adequate flow of financial resources to all productive sectors of the economy. As a result, India's macroeconomic fundamentals have been strengthening, with resilient economic activity, moderated inflation, narrowed current account deficit, comfortable foreign exchange reserves, ongoing fiscal consolidation, stable and robust credit growth in the banking system, and orderly development of domestic financial markets.

The central bank chief said, “In these challenging times, the Reserve Bank of India has continued to focus on preserving price and financial stability, while ensuring adequate flow of financial resources to all productive sectors of the economy. As a result, domestic macroeconomic fundamentals are strengthening – economic activity is exhibiting resilience; inflation has moderated; the current account deficit has narrowed; and foreign exchange reserves are comfortable. Fiscal consolidation is also ongoing. The Indian banking system remains stable and resilient, credit growth is robust and domestic financial markets have evolved in an orderly manner."

Regulatory Framework for Digital Banking and Expansion of e-RUPI Vouchers

Governor Shaktikanta Das announced that the RBI will establish a regulatory framework for default loss guarantee arrangements (DLGA) in digital banking. This move aims to promote responsible innovation and prudent risk management. Additionally, guidelines will be issued regarding DLGA in digital lending, facilitating the development of the digital lending ecosystem and enhancing credit penetration in the economy.

Furthermore, the RBI will allow non-banking prepaid payment instruments to issue e-RUPI vouchers. These vouchers are pre-paid digital instruments received by beneficiaries on their phones in the form of an SMS or QR code. The central bank's proposal to enable individuals to issue and redeem purpose-specific e-RUPI vouchers will simplify the process and expand the scope and reach of digital payments in India. Currently, 11 banks in partnership with the National Payments Corporation of India (NPCI) issue e-RUPI vouchers for specific purposes such as hospital bill payments.

RuPay Forex Cards To Be Issued Soon

Banks in India will now be permitted by the RBI to issue RuPay Prepaid Forex cards, expanding their usage at overseas ATMs, PoS machines, and online merchants. 

Furthermore, RuPay Debit, Credit, and Prepaid Cards can now be issued globally, including in India, enhancing accessibility and acceptance. The inclusion of an embedded microchip and a Personal Identification Number (PIN) in RuPay Debit/Credit Chip Cards ensures added security against counterfeiting/duplication and requires PIN verification for transactions at merchant outlets.

"RuPay Debit and Credit cards issued by banks in India have gained international acceptance through bilateral arrangements with international partners and co-badging arrangements with international card schemes. In order to expand payment options for Indians travelling abroad, it has been decided to allow issuance of RuPay Prepaid Forex cards by banks in India for use at ATMs, PoS machines and online merchants overseas. Further, RuPay Debit, Credit, and Prepaid Cards will be enabled for issuance in foreign jurisdictions, which can be used internationally, including in India. These measures will expand the reach and acceptance of RuPay cards globally. Necessary instructions will be issued separately," stated the RBI's Statement on Developmental and Regulatory Policies.