RBI monetary policy

RBI Monetary Policy: 5 Key Highlights from RBI MPC Outcome on Policy Rates, Inflation & Growth Forecast

The RBI’s recent monetary policy announcement made on October 9, 2024, is a key event in India’s financial landscape. Here’s a breakdown of the critical highlights:

1. Repo Rate Maintained at 6.5%
   The RBI has kept the repo rate steady at 6.5%, despite global interest rate cuts by other central banks, notably the US Federal Reserve. This decision came in response to India’s unique economic conditions, and the unanimous decision by the Monetary Policy Committee (MPC) to keep rates constant reflects caution around inflation and growth.
2. Inflation Concerns
   Inflation remains a core focus for the RBI. The central bank retained its inflation projection at 4.5% for FY25 but expects CPI to rise in September due to base effects and higher fuel prices. Despite fluctuations in food and fuel prices, the RBI expects core inflation to continue declining, but it remains on alert for geopolitical or weather-related risks that could alter this trajectory.
3. Growth Forecasts
   The RBI maintains its optimism on India’s GDP growth, projecting it to be around 7.2% for FY25. While the growth forecast for Q2FY25 was cut slightly, the outlook for subsequent quarters was raised. The overall economic outlook remains positive, but there is caution due to global uncertainties.
4. UPI Transaction Limit Increased
   To facilitate digital transactions, the RBI increased the per-transaction limit for UPI 1 2 3 Pay from ₹5,000 to ₹10,000 and raised UPI Lite wallet limits. This move aims to enhance the adoption of digital payment methods across all demographics in India.
5. Risks in Unsecured Loans
   Governor Das raised concerns over the growing stress in unsecured loan segments, such as microfinance and credit cards. He emphasized that banks and NBFCs (Non-Banking Financial Companies) must be cautious in assessing the risks in these areas, ensuring robust post-sanction monitoring and underwriting standards to avoid potential defaults.

Advantages of RBI Monetary Policy

1. Inflation Control
   By keeping the repo rate unchanged and signaling caution, the RBI ensures that inflation is kept in check without hindering economic growth.
2. Growth Prospects Intact
   The RBI’s outlook on India’s GDP growth is positive, showing confidence in the economy’s ability to expand despite global challenges.
3. UPI Limit Increase
   The enhancement of UPI limits promotes digital inclusivity and encourages the use of contactless payments across diverse segments of society.
4. Proactive Monitoring of Risks
   The central bank’s monitoring of unsecured loans shows prudence, helping to prevent any potential bubbles or defaults, ensuring stability in the financial system.
5. Flexibility in Policy
   The RBI’s shift from a “withdrawal of accommodation” to a “neutral” stance gives it more flexibility to adjust its monetary policy to changing economic conditions.

Disadvantages of RBI Monetary Policy

1. Repo Rate Stability May Not Suit All Sectors
   While the repo rate remaining at 6.5% helps control inflation, some sectors may have expected a reduction to stimulate borrowing and investment further.
2. Uncertainty in Inflation Path
   While the RBI projects inflation at 4.5%, the risk of fluctuating fuel prices and other geopolitical risks can still affect inflation forecasts.
3. No Immediate Relief in Interest Rates
   With no rate cuts expected in the near term, businesses and borrowers may have to continue managing high borrowing costs, which could slow investments in capital-intensive industries.
4. Risk of Stressed Loans
   Although the RBI is monitoring unsecured loans, a lack of immediate action could lead to increased stress in these segments, especially for low-income borrowers.
5. Global Economic Uncertainty
   With the global economy in flux, the RBI’s cautious stance may leave India vulnerable to external shocks if there are significant changes in global monetary policies.

Conclusion

The RBI’s October 2024 monetary policy reflects a careful balance between growth and inflation concerns. By keeping the repo rate steady and adjusting its policy stance to “neutral,” the central bank has demonstrated flexibility in its approach while remaining vigilant about inflation and financial stability. The policy also acknowledges the evolving digital payments landscape with the UPI limit increase and the risks posed by unsecured loans.

FAQs

1. Why did the RBI keep the repo rate unchanged at 6.5%?
   The RBI maintained the repo rate to ensure inflation remains under control while still supporting economic growth. Despite other central banks reducing rates, India’s inflation risks required a steady rate.
2. What is the RBI’s projection for GDP growth in FY25?
   The RBI projects India’s real GDP growth at 7.2% for FY25, with strong growth expected in the latter half of the year.
3. Why is inflation still a concern for the RBI?
   Inflation is a concern due to fluctuating food and fuel prices, as well as geopolitical risks. The RBI also anticipates a rise in inflation in September due to unfavorable base effects.
4. What changes did the RBI make to UPI transaction limits?
   The RBI increased the UPI 1 2 3 Pay per-transaction limit to ₹10,000 and raised the UPI Lite wallet limit to ₹5,000 to encourage greater use of digital payment methods.
5. What are the risks associated with unsecured loans?
   The RBI warned of stress buildup in unsecured loans like credit cards and microfinance, highlighting the need for banks and NBFCs to carefully monitor these loans to avoid defaults.

RBI monetary policy

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