Reserve Bank of India
Statement on Developmental and Regulatory Policies
This Statement sets out various developmental and regulatory policy measures relating to (i) Financial Markets; (ii) Regulation; (iii) Payment and Settlement Systems and (iv) Currency Management.
I. Financial Markets
1. Introduction of Securities Lending and Borrowing in Government Securities
A well-functioning market for securities lending and borrowing will add depth and liquidity to the Government securities market, aiding efficient price discovery. It is, therefore, proposed to permit lending and borrowing of Government securities which will augment the existing market for ‘special repos’. The system is expected to facilitate wider participation in the securities lending market by providing investors an avenue to deploy idle securities and enhance portfolio returns. Draft Directions will be issued separately for stakeholder comments.
II. Regulation
2. Recovery of Penal Charges on Loans
In terms of extant guidelines, Regulated Entities (REs) have the operational autonomy to formulate Board approved policy for levy of penal interest on advances which shall be fair and transparent. The intent of penal interest was essentially to inculcate a sense of credit discipline among borrowers through negative incentives but such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest. Supervisory reviews have indicated divergent practices amongst REs with regard to levy of penal interest which were excessive in certain cases, leading to customer grievances and disputes.
The extant regulatory guidelines on levy of penal interest have been reviewed in the above context. It has been decided that any penalty for delay/default in servicing of the loan or any other non-compliance of material terms and conditions of loan contract by the borrower shall be in the form of ‘penal charges’ in a reasonable and transparent manner and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest being charged on the advances. Further, there shall be no capitalisation of penal charges (i.e., the same shall be recovered separately and shall not be added to the principal outstanding). However, in case of any deterioration in credit risk profile of the borrower, REs shall be free to alter the credit risk premium under extant guidelines on interest rate. Draft guidelines to the above effect shall be placed on RBI website shortly, for comments from stakeholders.
3. Regulatory Initiatives on Climate Risk and Sustainable Finance
Being a full-service central bank with financial stability as part of its mandate, the Reserve Bank recognises that climate change can translate into climate-related financial risks for Regulated Entities (REs) which can have broader financial stability implications. Therefore, to prepare a strategy based on global best practices on mitigating the adverse impacts of climate change, a Discussion Paper (DP) on Climate Risk and Sustainable Finance was placed on RBI website on July 27, 2022, for public comments and feedback. Based on analysis of the feedback received in this regard, it has been decided to issue the following guidelines for REs:
a. Broad framework for acceptance of Green Deposits;
b. Disclosure framework on Climate-related Financial Risks, and;
c. Guidance on Climate Scenario Analysis and Stress Testing.
The guidelines will be issued in a phased manner. Further, the Reserve Bank shall have a dedicated webpage on its website which will consolidate all instructions, press releases, publications, speeches and related RBI communication on climate risk and sustainable finance.
III. Payment and Settlement Systems
4. Expanding the scope of Trade Receivables Discounting System (TReDS)
The guidelines on Trade Receivables Discounting System (TReDS) were issued in December 2014 with the objective of facilitating the financing of trade receivables of MSMEs. Subsequently, three entities started operating TReDS platforms and two more entities have been granted in-principle authorisation. These entities process about ₹60,000 crore worth of transactions annually.
To provide further impetus to TReDS platforms, their scope of activity is proposed to be expanded as stated below. These measures will help in further improving the cash flows of MSMEs.
i. Insurance facility will now be permitted on TReDS. This will encourage financing / discounting of payables of buyers irrespective of their credit ratings. Accordingly, insurance companies will be permitted to participate as a “fourth participant” on TReDS, apart from the MSME sellers, buyers and financiers.
ii. All entities / institutions eligible to undertake factoring business under the Factoring Regulation Act will be permitted to participate as financiers in TReDS.
iii. Secondary market operations will now be enabled on TReDS platforms. This would allow financiers to offload their existing portfolio to other financiers within the same TReDS platform, if required.
5. Extending UPI for Inbound Travellers to India
Unified Payments Interface (UPI) has become a ubiquitous payment instrument for retail electronic payments in India. An enhancement has recently been made to provide UPI access to non-resident Indians who have international mobile numbers linked to their NRE / NRO accounts. It is now proposed to permit all inbound travellers to India also to access UPI for their merchant payments (P2M) while they are in the country. To start with, this facility will be extended to travellers from the G-20 countries, arriving at select international airports. Going forward, this facility will be enabled across all other entry points in the country. Necessary operational instructions will be issued shortly.
IV. Currency Management
6. QR Code based Coin Vending Machine – Pilot project
To improve distribution of coins among members of the public, the Reserve Bank of India is preparing a pilot project on QR Code based Coin Vending Machine (QCVM) in collaboration with a few leading banks. The QCVM is a cashless coin dispensation machine which would dispense coins against a debit to the customer’s bank account using Unified Payments Interface (UPI).
Unlike cash-based traditional Coin Vending Machine, the QCVM would eliminate the need for physical tendering of banknotes and their authentication. Customers will also have the option to withdraw coins in required quantity and denominations in QCVMs.
The pilot project is planned to be initially rolled out at 19 locations in 12 cities across the country. These vending machines are intended to be installed at public places such as railway stations, shopping malls, marketplaces to enhance ease and accessibility. Based on the learnings from the pilot tests, guidelines would be issued to banks to promote better distribution of coins using QCVMs.
(Yogesh Dayal)
Chief General Manager
Press Release: 2022-2023/1681
Monetary Policy Statement, 2022-23 Resolution of the Monetary Policy Committee (MPC) February 6-8, 2023
On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (February 8, 2023) decided to:
- Increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.50 per cent with immediate effect.
Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.
- The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
The main considerations underlying the decision are set out in the statement below.
Assessment
Global Economy
2. The outlook on global growth has improved in recent months, despite the persistence of geopolitical hostilities and the impact of monetary policy tightening by central banks across the world. Nonetheless, global growth is expected to decelerate during 2023. Inflation is exhibiting some softening from elevated levels, prompting central banks to moderate the size and pace of rate actions. However, central banks are reiterating their commitment to bring down inflation close to their targets. Bond yields remain volatile. The US dollar has come off its recent peak, and equity markets have moved higher since the last MPC meeting. Weak external demand in major advanced economies (AEs), the rising incidence of protectionist policies, volatile capital flows and debt distress could, however, weigh adversely on prospects for emerging market economies (EMEs).
Domestic Economy
3. The first advance estimates (FAE) released by the National Statistical Office (NSO) on January 6, 2023, placed India’s real gross domestic product (GDP) growth at 7.0 per cent year-on-year (y-o-y) for 2022-23, driven by private consumption and investment. On the supply side, gross value added (GVA) was estimated at 6.7 per cent.
4. High frequency indicators suggest that economic activity has remained strong in Q3 and Q4:2022-23. Rabi acreage exceeded last year’s area by 3.3 per cent as on February 3, 2023. Industrial production expanded by 7.1 per cent in November, after contracting by 4.2 per cent in October. Capacity utilisation in manufacturing is now above its long period average. Port freight traffic, e-way bills and toll collections were buoyant in December. Purchasing managers’ indices (PMIs) for manufacturing as well as services remained in expansion in January, despite some moderation compared to the previous month.
5. Domestic demand has been sustained by strong discretionary spending. Urban demand exhibited resilience as reflected in healthy passenger vehicle sales and domestic air passenger traffic. Rural demand is improving. Investment activity is gradually gaining ground. Non-oil non-gold imports expanded in December. Merchandise exports, on the other hand, contracted in December on weak global demand.
6. CPI headline inflation moderated to 5.7 per cent (y-o-y) in December 2022 – after easing to 5.9 per cent in November – on the back of double digit deflation in vegetable prices. On the other hand, inflationary pressures accentuated across cereals, protein-based food items and spices. Fuel inflation edged up primarily from an uptick in kerosene prices. Core CPI (i.e., CPI excluding food and fuel) inflation rose to 6.1 per cent in December due to sustained price pressures in health, education and personal care and effects.
7. The overall liquidity remains in surplus, with average daily absorption under the LAF increasing to ₹1.6 lakh crore during December-January from an average of ₹1.4 lakh crore in October-November. On a y-o-y basis, money supply (M3) expanded by 9.8 per cent as on January 27, 2023, while non-food bank credit rose by 16.7 per cent. India’s foreign exchange reserves were placed at US$ 576.8 billion as on January 27, 2023.
Outlook
8. The outlook for inflation is mixed. While prospects for the rabi crop have improved, especially for wheat and oilseeds, risks from adverse weather events remain. The global commodity price outlook, including crude oil, is subject to uncertainties on demand prospects as well as from risks of supply disruptions due to geopolitical tensions. Commodity prices are expected to face upward pressures with the easing of COVID-related mobility restrictions in some parts of the world. The ongoing pass-through of input costs to output prices, especially in services, could continue to exert pressures on core inflation. The Reserve Bank’s enterprise surveys point to some softening of input cost and output price pressures in manufacturing. Taking into account these factors and assuming an average crude oil price (Indian basket) of US$ 95 per barrel, inflation is projected at 6.5 per cent in 2022-23, with Q4 at 5.7 per cent. On the assumption of a normal monsoon, CPI inflation is projected at 5.3 per cent for 2023-24, with Q1 at 5.0 per cent, Q2 at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.6 per cent, and risks evenly balanced (Chart 1).
9. The stronger prospects for agricultural and allied activities are likely to boost rural demand. The rebound in contact-intensive sectors and discretionary spending is expected to support urban consumption. Businesses and consumers surveyed by the Reserve Bank are optimistic about the outlook. Strong credit growth, resilient financial markets, and the government’s continued thrust on capital spending and infrastructure create a congenial environment for investment. On the other hand, external demand is likely to be dented by a slowdown in global activity, with adverse implications for exports. Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent, Q2 at 6.2 per cent, Q3 at 6.0 per cent and Q4 at 5.8 per cent, and risks broadly balanced (Chart 2).
10. The easing of inflation in the last two months was driven by strong deflation in vegetables, which may dissipate with the summer season uptick. Headline inflation excluding vegetables has been rising well above the upper tolerance band and may remain elevated, especially with high core inflation pressures. Inflation, therefore, remains a major risk to the outlook. Domestic economic activity is expected to remain resilient aided by the sustained focus on capital and infrastructure spending in the Union Budget 2023-24, even as continuing fiscal consolidation creates space for private investment. While the policy repo rate increases undertaken since May 2022 are working their way through the system, it is imperative to remain alert on inflation so as to ensure that it remains within the tolerance band and progressively aligns with the target. On balance, the MPC is of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and thereby strengthen medium-term growth prospects. Accordingly, the MPC decided to increase the policy repo rate by 25 basis points to 6.50 per cent. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
11. Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to increase the policy repo rate by 25 basis points. Dr. Ashima Goyal and Prof. Jayanth R. Varma voted against the repo rate hike.
12. Dr. Shashanka Bhide, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Dr. Ashima Goyal and Prof. Jayanth R. Varma voted against this part of the resolution.
13. The minutes of the MPC’s meeting will be published on February 22, 2023.
14. The next meeting of the MPC is scheduled during April 3, 5 and 6, 2023.
(Yogesh Dayal)
Chief General Manager
Press Release: 2022-2023/1680
Governor’s Statement
As I set out the first monetary policy statement of the new year, I am reminded of the historical significance of 2023 for the Reserve Bank of India. From being a Joint Stock Company, the Reserve Bank was brought into public ownership on January 1, 1949.1 Thus, 2023 marks the 75th year of public ownership of the Reserve Bank and its emergence as a national institution. This is an opportune moment to briefly reflect upon the evolution of monetary policy over this period. In the two decades after independence, the Reserve Bank’s role was to support the credit needs of the economy under the five-year plans. The following two decades were characterised by bank nationalisation in 1969, oil shocks, monetisation of large budget deficits and sharp rise in money supply and inflation. Monetary targeting was adopted in the mid-1980s to contain growth in money supply and curb inflation pressures. Since the early 1990s, the Reserve Bank focused on market reforms and institution building. A multiple indicator approach was adopted in April 1998 under which a host of indicators were monitored for policy making. In the aftermath of the global financial crisis and the taper tantrum, as inflationary conditions worsened in India, flexible inflation targeting (FIT) was formally adopted in June 2016 to provide a credible nominal anchor for monetary policy. As we know, the primary objective of monetary policy under the FIT framework is to maintain price stability while keeping in mind the objective of growth.
2. Coming to present times, the unprecedented events of the last three years have put to test monetary policy frameworks globally. In a very short period, monetary policies across the world have veered from one extreme to the other in response to a series of overlapping shocks. In contrast to the Great Moderation era of the 1990s and the early years of this century, monetary policy was confronted with an unprecedented contraction in economic activity followed by a surge in global inflation. This calls for a deeper understanding of the structural changes in the global economy and inflation dynamics, and their implications for the conduct of monetary policy.
3. In the current unsettled global environment, emerging market economies (EMEs) are facing sharp trade-offs between supporting economic activity and controlling inflation, while preserving policy credibility. As global fault lines emerge in trade, technology and investment flows, there is an urgent need to reinforce global cooperation. The world is looking to India, now at the helm of G-20, to energise global partnership in several critical areas. This reminds me of what Mahatma Gandhi had said: “I do believe that…India…can make a lasting contribution to the peace and solid progress of the world.”2
Decisions and Deliberations of the Monetary Policy Committee (MPC)
4. The Monetary Policy Committee (MPC) met on 6th, 7th and 8th February 2023. Based on an assessment of the macroeconomic situation and its outlook, the MPC decided by a majority of 4 members out of 6 to increase the policy repo rate by 25 basis points to 6.50 per cent, with immediate effect. Consequently, the standing deposit facility (SDF) rate will stand revised to 6.25 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent. The MPC also decided by a majority of 4 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
5. Let me now explain the MPC’s rationale for these decisions on the policy rate and the stance. The global economic outlook does not look as grim now as it did a few months ago. Growth prospects in major economies have improved, while inflation is on a descent, though it still remains well above the target in major economies. The situation remains fluid and uncertain. Reflecting the recent optimism, the IMF has revised upwards the global growth estimates for 2022 and 2023.3 As price pressures wane, several central banks have opted for slower rate hikes or pauses. The US dollar has retreated sharply from its highest level in two decades. Tighter financial conditions caused by aggressive monetary policy actions, volatile financial markets, debt distress, protracted geopolitical hostilities and fragmentation continue to impart high uncertainty to the outlook for the global economy.
6. Amidst these volatile global developments, the Indian economy remains resilient. Real GDP growth is estimated at 7.0 per cent in 2022-23, according to the first advance estimate of the National Statistical Office (NSO). Higher rabi acreage, sustained urban demand, improving rural demand, robust credit expansion, gains in consumer and business optimism and the government’s enhanced thrust on capital expenditure and infrastructure in the Union Budget 2023-24 should support economic activity in the coming year. Weak external demand and the uncertain global environment, however, would be a drag on domestic growth prospects.
7. Consumer price inflation in India moved below the upper tolerance level during November-December 2022, driven by a strong decline in prices of vegetables. Core inflation, however, remains sticky.
8. Looking ahead, while inflation is expected to moderate in 2023-24, it is likely to rule above the 4 per cent target. The outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude oil prices. At the same time, economic activity in India is expected to hold up well. The rate hikes since May 2022 are still working their way through the system. On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium-term growth prospects. Accordingly, the MPC decided to raise the policy repo rate by 25 basis points to 6.50 per cent. The MPC will continue to maintain strong vigil on the evolving inflation outlook so as to ensure that it remains within the tolerance band and progressively aligns with the target.
9. Inflation is expected to average 5.6 per cent in Q4:2023-24 while the policy repo rate is 6.50 per cent. Adjusted for inflation, the policy rate still trails its pre-pandemic levels. Liquidity remains in surplus, with an average daily absorption of ₹1.6 lakh crore under the LAF in January 2023. The overall monetary conditions, therefore, remain accommodative and hence, the MPC decided to remain focused on withdrawal of accommodation.
Assessment of Growth and Inflation
Growth
10. Available data for Q3 and Q4:2022-23 indicate that economic activity in India remains resilient. Urban consumption demand has been firming up, driven by sustained recovery in discretionary spending, especially on services such as travel, tourism and hospitality. Passenger vehicle sales and domestic air passenger traffic posted robust year-on-year (y-o-y) growth. Domestic air passenger traffic crossed pre-pandemic levels for the first time in December 2022. Rural demand continues to show signs of improvement as tractor sales and two-wheeler sales expanded in December. Several high frequency indicators4 also point towards strengthening of activity.
11. Investment activity continues to gain traction. Non-food bank credit expanded by 16.7 per cent (y-o-y) as on January 27, 2023. The total flow of resources to the commercial sector has increased by ₹20.8 lakh crore during 2022-23 so far as against ₹12.5 lakh crore a year ago. Indicators of fixed investment – cement output; steel consumption; and production and import of capital goods – registered robust growth in November and December. In several sectors such as cement, steel, mining and chemicals, there are signs that additional capacity is being created in the private sector. According to the RBI’s survey, seasonally adjusted capacity utilisation increased to 74.5 per cent in Q2:2022-23. The drag from net external demand, on the other hand, continued as merchandise exports contracted in Q3:2022-23.
12. On the supply side, agricultural activity remains strong with good rabi sowing, higher reservoir levels, good soil moisture, favourable winter temperature and comfortable availability of fertilisers.5 PMI manufacturing and PMI services remained in expansion at 55.4 and 57.2 respectively, in January 2023.
13. Turning to the outlook, the expected higher rabi output has improved the prospects of agriculture and rural demand. The sustained rebound in contact-intensive sectors should support urban consumption. Broad-based credit growth, improving capacity utilisation, government’s thrust on capital spending and infrastructure should bolster investment activity. According to our surveys, manufacturing, services and infrastructure sector firms are optimistic about the business outlook. On the other hand, protracted geopolitical tensions, tightening global financial conditions and slowing external demand may continue as downside risks to domestic output. Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.0 per cent; and Q4 at 5.8 per cent. The risks are evenly balanced.
Inflation
14. Headline CPI inflation moderated by 105 basis points during November-December 2022 from its level of 6.8 per cent in October 2022. This was due to a softening in food inflation on the back of a sharp deflation in vegetable prices, which more than offset the inflationary pressures from cereals, protein-based food items and spices. As a result of this earlier than anticipated and steeper seasonal decline in vegetable prices, inflation for Q3:2022-23 has turned out to be lower than our projections. Core CPI inflation (i.e., CPI excluding food and fuel), however, remained elevated.
15. Going ahead, the food inflation outlook will benefit from a likely bumper rabi harvest led by wheat and oilseeds. Mandi arrivals and kharif paddy procurement have been robust, resulting in improvement in buffer stocks of rice. All these developments augur favourably for the food inflation outlook in 2023-24.
16. Considerable uncertainties remain on the likely trajectory of global commodity prices, including price of crude oil. Commodity prices may remain firm with the easing of COVID-19 related restrictions in some parts of the world. The ongoing pass-through of input costs, especially in services, could keep core inflation at elevated levels. The commitment to fiscal consolidation that has been carried forward in the Union Budget 2023-24 and the future trajectory of reducing the gross fiscal deficit will engender an environment of macroeconomic stability. This augurs well for the inflation outlook. Further, the low volatility of the Indian rupee relative to peer currencies limits the impact of imported price pressures and other global spillovers. Taking into account these factors and assuming an average crude oil price (Indian basket) of US$ 95 per barrel, inflation is projected at 6.5 per cent in 2022-23, with Q4 at 5.7 per cent. On the assumption of a normal monsoon, CPI inflation is projected at 5.3 per cent for 2023-24, with Q1 at 5.0 per cent, Q2 at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.6 per cent. The risks are evenly balanced.
17. Headline inflation has moderated with negative momentum in November and December 2022, but the stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down inflation. Thus, monetary policy has to be tailored to ensuring a durable disinflation process. A rate hike of 25 basis points is considered as appropriate at the current juncture. The reduction in the size of the rate hike provides the opportunity to evaluate the effects of the actions taken so far on the inflation outlook and on the economy at large. It also provides elbow room to weigh all incoming data and forecasts to determine appropriate actions and policy stance, going forward. Monetary policy will continue to be agile and alert to the moving parts in the inflation trajectory to effectively address the challenges to the economy.
Liquidity and Financial Market Conditions
18. As we approach the end of 2022-23, it is worthwhile to recapitulate the key developments on the monetary policy front over the last one year. After the onset of the war in Europe, which drastically altered the growth-inflation dynamics across the world, including India, we have taken a series of steps in the best interest of the Indian economy. We accorded primacy to price stability over growth in April 2022; we instituted a major reform in the monetary policy operating procedure through the introduction of the standing deposit facility (SDF); we restored the width of the policy corridor to its pre-pandemic level; we raised the repo rate by 40 bps and the cash reserve ratio (CRR) by 50 bps in an off-cycle meeting in May; we shifted the policy stance to focus on withdrawal of accommodation; we continued the rate tightening cycle in every meeting of the MPC; and we adopted a nimble and flexible approach to liquidity management by conducting both variable rate reverse repo (VRRR) and variable rate repo (VRR) operations as per requirement. As a result of all these measures, the real policy rate has been nudged into positive territory; the banking system has moved out of the Chakravyuh6 of excess liquidity; inflation is moderating; and economic growth continues to be resilient.
19. As I make this statement, system liquidity remains in surplus, though of a lower order compared to April 2022. In the period ahead, while higher government expenditure and the anticipated return of forex inflows are likely to augment systemic liquidity, it would get modulated by the scheduled redemption of LTRO and TLTRO7 funds during February to April 2023. The Reserve Bank will remain flexible and responsive towards meeting the productive requirements of the economy. We will conduct operations on either side of the LAF, depending on the evolving liquidity conditions.
20. As part of our gradual move towards normalising liquidity and market operations, it has now been decided to restore market hours for the Government Securities market to the pre-pandemic timing of 9 am to 5 pm.8 Moreover, as part of our ongoing endeavour to further develop the government securities market, we propose to permit lending and borrowing of G-secs. This will provide investors with an avenue to deploy their idle securities, enhance portfolio returns and facilitate wider participation. This measure will also add depth and liquidity to the G-sec market; aid efficient price discovery; and work towards a smooth completion of the market borrowing programme of the centre and states.
21. The pace of transmission of monetary policy actions to lending and deposit rates has strengthened in the current tightening cycle. The weighted average lending rates (WALR) on fresh rupee loans and outstanding loans increased by 137 bps and 80 bps respectively, during May to December 2022. The weighted average domestic term deposit rate on fresh deposits and outstanding deposits increased by 213 bps and 75 bps respectively.
22. The Indian Rupee has remained one of the least volatile currencies among its Asian peers in calendar year 2022 and continues to be so this year also.9 Similarly, the depreciation and the volatility of the Indian rupee during the current phase of multiple shocks is far lower than during the global financial crisis and the taper tantrum.10 In a fundamental sense, the movements of the rupee reflect the resilience of the Indian economy.
External Sector
23. The current account deficit (CAD) for the first half of 2022-23 stood at 3.3 per cent of GDP. The situation has shown improvement in Q3:2022-23 as imports moderated in the wake of lower commodity prices, resulting in narrowing of the merchandise trade deficit. Further, services exports rose by 24.9 per cent (y-o-y) in Q3:2022-23, driven by software, business and travel services. Global software and IT services spending is expected to remain strong in 2023. Remittance growth for India in H1 of 2022-23 was around 26 per cent – more than twice the World Bank’s projection for the year. This is likely to remain robust owing to better growth prospects of the Gulf countries. The net balance under services and remittances are expected to remain in large surplus, partly offsetting the trade deficit. The CAD is expected to moderate in H2:2022-23 and remain eminently manageable and within the parameters of viability.11
24. On the financing side, net foreign direct investment (FDI) flows remain strong at US $ 22.3 billion during April-December 2022 (US$ 24.8 billion in the corresponding period last year). Foreign portfolio flows have shown signs of improvement with positive flows of US$ 8.5 billion during July to February 6, led by equity flows (foreign portfolio flows are, however, negative during the financial year so far). Net inflows under non-resident deposits increased to US$ 3.6 billion during April-November 2022 from US $ 2.6 billion a year ago, boosted by the Reserve Bank’s July 6th measures. Foreign exchange reserves have rebounded from US$ 524.5 billion on October 21, 2022 to US$ 576.8 billion as on January 27, 2023 covering around 9.4 months of projected imports for 2022-23. India’s external debt ratios are low by international standards.12
Additional Measures
25. I shall now announce certain additional measures.
Penal Charges on Loans
26. At present, Regulated Entities (REs) are required to have a policy for levy of penal interest on advances. The REs, however, follow divergent practices on levying of such charges. In certain cases, these charges are founded to be excessive. To further enhance transparency, reasonableness and consumer protection, draft guidelines on levy of penal charges will be issued to obtain comments from stakeholders.
Climate Risk and Sustainable Finance
27. Recognising the importance of climate related financial risks which may have financial stability implications, the Reserve Bank had issued a Discussion Paper on Climate Risk and Sustainable Finance in July 2022. Based on the feedback received, it has been decided to issue guidelines for REs on (i) a broad framework for acceptance of Green Deposits; (ii) disclosure framework on Climate-related Financial Risks; and (iii) guidance on Climate Scenario Analysis and Stress Testing.
Expanding the Scope of TReDS
28. For the benefit of MSMEs, the Reserve Bank had introduced a framework in 2014 to facilitate financing of their trade receivables through Trade Receivables Discounting System (TReDS). It is now proposed to expand the scope of TReDs by (i) providing insurance facility for invoice financing; (ii) permitting all entities/institutions undertaking factoring business to participate as financiers in TReDS; and (iii) permitting re-discounting of invoices (that is, developing a secondary market in TReDS). These measures are expected to improve the cash flows of the MSMEs.
Extending UPI for Inbound Travellers to India
29. UPI has become hugely popular for retail digital payments in India. It is now proposed to permit all inbound travellers to India to use UPI for their merchant payments (P2M) while they are in the country. To begin with, this facility will be extended to travellers from G-20 countries arriving at select international airports.
QR Code based Coin Vending Machine – Pilot project
30. The Reserve Bank of India will launch a pilot project on QR Code based Coin Vending Machine (QCVM) in 12 cities. These vending machines will dispense coins against debit to the customer’s account using UPI instead of physical tendering of banknotes. This will enhance the ease of accessibility to coins. Based on the learnings from the pilot, guidelines will be issued to banks to promote distribution of coins using these machines.
Conclusion
31. As we begin a new year, it is a good time to reflect upon our journey so far and what lies ahead. When I look back, it is heartening to note that the Indian economy successfully dealt with multiple major shocks in the last three years and has emerged stronger than before. India has the inherent strength, an enabling policy environment, and strong macroeconomic fundamentals and buffers to deal with the future challenges. I am reminded here of the words of Netaji Subhas Chandra Bose: “……..never lose your faith in the destiny of India”.13
Thank you. Namaskar.
(Yogesh Dayal)
Chief General Manager
Press Release: 2022-2023/1679
Notes:-
1 The ownership of RBI was transferred to the Government through a Central Government notification under “The Reserve Bank (Transfer to Public Ownership) Act, 1948”.
2 Young India, 1927-1928, Unity in Variety, 11th August, 1927.
3 According to the International Monetary Fund’s January 2023 update of World Economic Outlook, the global growth for 2022 has been revised upwards from 3.2 per cent to 3.4 per cent, while that of 2023 has been raised to 2.9 per cent from 2.7 per cent projected in October 2022.
4 Port freight traffic; railway freight traffic; toll collections; E-way bills; diesel consumption; and electricity consumption.
5 Rabi sowing, as on February 3, 2023, was 3.3 per cent higher than a year ago (9.3 per cent higher than normal as on date). As of February 02, 2023, reservoir levels were at 63 per cent of the full capacity and above the decadal average of 53 per cent.
6 Chakravyuh: a military formation used to surround enemies, depicted in the Indian epic Mahabharata. It resembles a labyrinth of multiple defensive walls, from which coming out is very difficult and known only to a handful of very skilled warriors.
7 The Reserve Bank provided low cost funds at the repo rate of up to 3-years maturity to banks during February to April 2020 to improve monetary transmission, mitigate the impact of the COVID-pandemic and alleviate liquidity stress in entities/specific sectors under long-term repo operations (LTROs) and targeted long-term repo operations (TLTROs).
8 We had earlier restored market hours from 9.00 am to 5.00 pm in several segments of the money market in December 2022.
9 Volatility measured in terms of coefficient of variation was 3.5 per cent for INR during calendar year 2022 as compared to 3.7 per cent for Malaysian ringgit, 4.7 per cent for Thai Baht, and 4.8 per cent for Philippine peso.
10 During the global financial crisis, the Indian Rupee depreciated by 23 per cent against the US dollar between April 1, 2008 and March 3, 2009. Similarly, it depreciated by 22 per cent during the taper tantrum between May 01, 2013 and Aug 28, 2013. However, the extent of Rupee depreciation was lower in each subsequent episode of turbulence. In the initial days of the pandemic, i.e., between February 17, 2020 and April 21, 2020, the Rupee depreciated by only 7 per cent. Even during the period of geopolitical tensions emerging out of Ukraine in 2022, while the Rupee lost 9 per cent against the US dollar between February 24, 2022 and October 19, 2022, it outperformed the currencies of most advanced and many emerging market economies. The 1-month implied volatility of the Rupee touched a high of 25 per cent during the global financial crisis on October 10, 2008 and 20 per cent during the taper tantrum period on August 29, 2013. During the COVID-19 pandemic, however, the implied volatility peaked at 10% on March 24, 2020.
11 Das, Shaktikanta (2023); “Financial markets in India: In pursuit of stability and development”; Keynote Address at the 22nd FIMMDA-PDAI Annual Conference, Dubai on January 27, 2023.
12 India’s external debt/GDP ratio fell from 19.9 per cent in March 2022 to 19.2 per cent in September. The debt service ratio declined from 5.2 per cent in 2021-22 to 5.0 per cent in September 2022.
13 “India will be free”- Message of August 17, 1945 to Indians in East Asia – Selected Speeches of Subhas Chandra Bose, Publications Division, Ministry of Information and Broadcasting, Government of India.
