Monetary Policy Key Takeaways: RBI On US Soft Landing, Sluggish Deposits, Hawkish Stance And More

• Banks finding it difficult to raise deposits.

• Depositors shifting to alternative investments.

• Banks shifting to short-term fundraising.

• Liquidity issues will arise for banks.

• Bank funds continue to be diverted to speculative trading.

• Top-up loans on housing loans are being diverted.

• Some institutions not following RBI rules.

Buoyant growth outlook gives RBI to keep rates elevated till such time that it feels that inflation has subsided on a durable basis, Aditi Gupta, an economist at Bank of Borado said.

"Given the outlook on food prices, especially vegetable prices, we do not expect the RBI to cut rates before Dec’24." There is also a very real possibility that the rate cut could be pushed back even further, Gupta said.

The RBI policy was on expected lines with both rate and stance being retained, Gupta said.

The status quo for the ninth time demonstrates a careful balance between a robust domestic economy and global uncertainties, according to, Samantak Das, chief economist and head of research at JLL India.

The RBI's intention in keeping rates unchanged is to ensure a stable interest rate environment and price stability in order to achieve sustained growth, he said. "Future rate cuts in India will primarily be influenced by domestic factors."

The Reserve Bank of India will not micro-manage banks on mobilising deposits and these institutions will have to make their own decision, according to Governor Shaktikanta Das.

• It is for banks to make their own decision on mobilising deposits.

• Risk management systems in banks have become much more robust.

• Don't want to micro-manage banks.

• Our supervisors do interact with banks on an ongoing basis on issues like the slow growth of deposits.

• It is for banks to take the required measures to bolster deposit growth.

• We watch all incoming data from the banking sector.

• Wherever required, RBI will take action on banking regulations.

Individuals must make their own decisions on where to invest their money, Governor Shaktikanta Das said amid the SEBI consulting paper to tame the boom in the derivatives space.

• The early warning group of RBI has discussed F&O trends with SEBI.

• Divergence of growth of deposits and loans can lead to a liquidity management issue.

• Not suggesting that people should put more money in deposits rather than equity.

• Individuals must make their own decisions on where to invest their money

There is a shift of savings from financial to physical savings like realty and there doesn’t seem to be much exposure to equity in household savings, Michael Patra, deputy governor said.

• There doesn’t seem to be much exposure to equity in household savings

• There is a churn of precautionary savings made during Covid-19

• Savings are returning to more normal levels.

• There is a shift of savings from financial to physical savings like real estate.

• Total household savings has stabilised at 20% after falling for some time

Banks should use bank networks, and come up with innovative product offerings to mobilise deposits, Governor Shaktikanta Das said.

• Have put out draft guidelines on liquidity coverage ratio for banks.

• Will finalise decision on liquidity requirements for banks based on inputs received.

• It is up to banks to take a call on deposit rates.

• Banks should use bank networks, and come up with innovative product offerings to mobilise deposits.

It would be premature to talk about a recession in the US based on unemployment data of one month, Governor Shaktikanta Das said.

• Unemployment data in the US has led to speculation on rate cuts by Fed.

• Overall US employment doing quite well.

• Can’t rush to the conclusion of a slowdown in an economy like the U.S. based on unemployment data of one month

• We will be watchful of all incoming data from domestic, and external sources.

• International agencies like IMF have projected that world trade will grow this year.

• Domestic economic growth is resilient.

• Inflation moderated from high levels, but the pace of disinflation is uneven and slow.

• There is still a distance to cover to align CPI inflation with 4% target.

• Financial sector is stable with a well-capitalised, unclogged balance sheet.

• India has enhanced resilience from spillover from external shocks.

• Forex reserves have reached a historic high.

• RBI remains committed to ensure the orderly evolution of financial markets.

The Indian rupee weakened to a fresh record low and neared the Rs 84 mark against the US dollar after the RBI Governor kept the key repo rate unchanged.

The local currency appreciated by 4 paise to a record low of 83.99 against the US dollar after opening falt, according to Bloomberg. The currency closed at 83.95 on Wednesday.

The Reserve Bank of India will continue to remain nimble, and flexible in liquidity management, according to Governor Shaktikanta Das during his address.

India's Inflation and growth are evolving in a balanced manner but must be patient and recognise the challenges along the way, Governor Shaktikanta Das said while concluding his address.

• Inflation and growth are evolving in a balanced manner

• Inflation has been trending downward.

• Have made progress in achieving price stability.

• Progress in achieving price stability has been uneven.

• Need to remain vigilant to ensure inflation moves sustainably towards target.

• Recognise the challenges along the way, but have to be patient.

The Reserve Bank of India proposed to create a public repository of digital lending apps to help identify unauthorised ones, according to Governor Shaktikanta Das. Meanwhile, the transaction limit of tax payment through UPI is raised to Rs 5 lakh from Rs 1 lakh.

• Propose to create a public repository of digital lending apps.

• A public repository of digital lending apps will help identify unauthorised lending apps.

• Transaction limit of tax payment through UPI raised to Rs 5 lakh from Rs 1 lakh.

• Propose to increase the frequency of reporting to credit bureaus to fortnightly intervals.

• To reduce the window of cheque clearing; to be cleared within few hours of presentation.

Banks and financial institutions need to build resilient frameworks as the recent outage showed that minor issues can wreak havoc on the global stage, Governor Shaktikanta Das.

• The recent outages showed that minor issues can wreak havoc on the global stage.

• Necessary that banks and financial institutions build a resilient framework.

• RBI has time and again emphasised robust business continuity plans.

The RBI has observed that top-up loans provided by banks and non-banking financial companies have been growing at a brisk pace.

• Banks and NBFCs offer top-up loans on collateralised loans such as gold, home loans.

• Regulatory prescriptions on loan-to-value are not being adhered to by certain entities in the case of top-up loans.

• Such practices may lead to loan funds being deployed in unproductive segments or speculative purposes.

• Banks and NBFCs should review and take remedial action

It is observed that alternative investment avenues are becoming more attractive to retail customers, Governor Shaktikanta Das noted.

• Banks take greater recourse to short-term non-retail deposits and other short-term liabilities.

• This may potentially expose banks to structural liquidity issues.

• Banks should focus more on householding financial savings through innovative products and branch networks.

The developments in the global markets have implications for emerging market economies, according to Governor Shaktikanta Das.

• Market participants must keep in mind India's robust fundamentals.

• RBI remains committed to ensuring the orderly evolution of financial markets.

The Reserve Bank of India will continue to remain nimble, and flexible in liquidity management, according to Governor Shaktikanta Das.

• 10-year India bond yield softened further in July.

• RBI will continue to be nimble, and flexible in liquidity management.

• Yields on certificates of deposits and 3-month treasury bills softened.

• Term premium has remained steady in recent months.

• Transmission in the credit market remains ongoing.

• The weighted average call rate remained close to the middle of the Liquidity Adjustment Framework corridor.

The Reserve Bank of India cannot become complacent merely because core inflation has fallen and has to remain vigilant to prevent spillovers or second-round effects from persistent food inflation, Governor Shaktikanta Das said.

• Seeing considerable divergence between headline and core inflation.

• Cannot and should not become complacent because core inflation has fallen.

• MPC may look through high food inflation if it is transitory

• In an environment of high food inflation, MPC can’t afford to look through it.

• MPC has to remain vigilant to prevent spillovers or second-round effects from persistent food inflation

Governor Shaktikanta Das said that the Reserve Bank of India sees India to record a CPI inflation of 4.5% in the ongoing fiscal year.

• CPI inflation is seen at 4.4% in the second quarter, 4.7% in the third quarter, and 4.3% in the fourth quarter of FY25.

• Target is headline inflation, where food inflation has a weight of 46%, Das said in his address.

The Reserve Bank of India sees a real GDP growth of 7.2% for the financial year 2026, Governor Shaktikanta Das said.

Governor Shaktikanta Das said that the Reserve Bank of India has retained the real GDP growth for the ongoing fiscal year at 7.2%.

The central bank sees GDP growth for the first, second, third and fourth quarter of the current fiscal at 7.1%, 7.2%, 7.3% and 7.2% respectively, Das said.

The RBI governor emphasised that while the near-term outlook looks positive, there remain significant challenges to the medium-term global growth outlook.

• IIP growth accelerated in May this year.

• PMI for manufacturing at 58.1 in July remained elevated.

• PMI services stood strong at 60.3 in July, above 60 in seven consecutive months.

• Fixed investment activity remained buoyant amidst government’s thrust on capex.

Inflation across the globe is receding grudgingly, Governor Shaktikanta Das and added that policies are showing signs of divergence across geographies.

• Inflation is receding grudgingly across major economies.

• Monetary policy is showing signs of divergence across geographies.

• Many central banks are moving toward policy pivots, while some have tightened rates as well.

The headline inflation increased to 5.1% in June, primarily driven by the food component, according to Governor Shaktikanta Das.

• The fuel component in CPI basket remained in deflation.

• The expected moderation of headline inflation is likely to reverse in the third quarter.

• Resilient, steady growth in GDP enables monetary policy to focus unambiguously on inflation.

• Ensuring price stability eventually supports a period of sustained growth.

The domestic growth remains strong with inflation remaining in a declining trajectory, says Governor Shaktikanta Das.

• A flexible inflation-targeting framework has withstood pandemic-related stress.

• A flexible inflation-targeting framework has worked well.

• The increase in inflation was driven by the food component, which remained stubborn, Das said.

The Monetary Policy Committee has decided to maintain the repo rate at 6.5% for the ninth consecutive time.

Out of the six MPC members, four voted in favour of maintaining the policy repo rate. The MPC has chosen to uphold its monetary policy stance at 'withdrawal of accommodation'.

The Reserve Bank of India's Governor Shaktikanta Das will shortly announced the key rate decision, the final after the Union Budget and the Fed signalling chances of a rate cut in September. The six-member Monetary Policy Committee is anticipated to maintain the repo rate at 6.5%

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India's benchmark equity indices were back in the red after one-day rise with Infosys dragging them by the most. Traders await the outcome of monetary policy meeting due later in the session.

At pre-open, the Nifty traded at 24248.55, down 0.20% or 48.95 points and the Sensex was at 79420.81, down 0.06% or 47.20 points.

The recent trend in institutional activity in the market indicates a clear trend, according to V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services. "FIIs are in a risk-off mood and are playing it safe with sustained selling."

The heightened volatility in the market triggered by US recession fears and the unwinding of the yen carry trade is likely to persist for some time, he said. "Investors should wait for clarity on these two issues."

The Indian rupee opened flat against the US dollar on Thursday ahead of the Reserve Bank of India's monetary policy outcome.

The local currency opened flat at 83.94 against the US dollar, according to Bloomberg data. The currency closed at 83.95 on Wednesday after touching a fresh low of 83.98 against the greenback.

Further, the yield on the 10-year benchmark bond opened flat at 6.86% during the session.

With Governor Shaktikanta Das set to announce the key policy rate shortly, all rate-sensitive stocks will be in focus during the trade on Thursday. Banks and financial services, automobiles, real estate and other key sectors and stock will be on the radar.

Meanwhile, India's benchmark indices—the NSE Nifty 50 and the S&P BSE Sensex—have risen 11.5 and 9.7%, respectively, making them the sixth and seventh best performing Asian indices.

The US Federal Reserve has maintained its key interest rate for the eighth consecutive time, as expected, and maintained its wait-and-watch approach for inflation to ebb.

The Federal Open Market Committee decided unanimously to hold its key interest rate at 5.25–5.5% in July. It however kept the rate cut on the table for the next meeting in September.

The central bank raised rates by 25 basis points in July last year, bringing the benchmark rate to its highest level in 22 years. However, since then, it has left the rates unchanged.

Meanwhile, the US markets plunged during the week as weak economic data pointed to an increased recession risk with traders weighing aggressive rate cuts by the Fed.

Economists at Goldman Sachs raised the probability of recession in the next year to 25% from 15%.

The Bank of Japan in its latest meeting, raised the policy rate to 0.25% from 0.0–0.1% while allowing the monthly government bond buying to be ¥3 trillion in Jan-Mar 2026.

The monetary policy tightening last week triggered a wave of criticism after it helped set off a plunge in Japanese stocks and contributed to global market turmoil.

Expectations of further hikes by the central bank have resulted in a sell-off of the yen-funded carry trade. The unwinding of carry trade in the Japanese yen led to its appreciation against the US dollar, which disrupted global markets.

India's Monetary Policy Committee in June, led by RBI Governor Shaktikanta Das, kept the benchmark repo rate unchanged for the eighth straight meet.

The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth

After the review, the MPC decided the following on lending rates:

• To keep the repo rate unchanged at 6.5% with a 4:2 majority, as compared with 5:1 previously. Ashima Goyal and Jayanth R Varma voted to reduce the policy repo rate by 25 basis points.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, is at 6.25%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, is at 6.75%.

The committee had raised the benchmark repo rate by 250 basis points in the last cycle before opting for a pause in April last year.

India aims to continue its fiscal consolidation path in the ongoing financial year by lowering its deficit target in the recently concluded Union budget.

The union government will target a fiscal deficit of 4.9% of the gross domestic product for FY25, compared to a target of 5.1% set in the interim budget, Finance Minister Nirmala Sitharaman said.

For FY24 too, the fiscal deficit has been revised to 5.6% of the GDP. Gross borrowings are pegged at Rs 14.13 lakh crore, as estimated in the interim budget. Net borrowings are pegged at Rs 11.63 lakh crore.

The Indian rupee recently touched record lows against the US dollar and extended its fall towards the Rs 84 mark, despite continuing intervention by the central bank.

The rupee ended flat at Rs 83.95 after erasing morning gains during the last hours of trade on Wednesday. It had hit a fresh low of Rs 83.98 against the US dollar on Tuesday.

In recent months, the demand for the merchant dollar has surpassed the supply in both the spot and forward markets, leading to a surge in long dollar positions, according to a note from SBI. Thus, the rupee might remain under pressure, it said.

India's real gross domestic product, or GDP, growth for fiscal 2025 is projected at 7% with risks evenly balanced, according to the Reserve Bank of India's recent annual report. This would mark the fourth successive year of 7% or above growth.

The Indian economy expanded at a robust pace in fiscal 2024, with real GDP growth accelerating to 7.6% from 7% in the previous year, the central bank said.

The outlook for the Indian economy remains bright, underpinned by a sustained strengthening of macroeconomic fundamentals, robust financial and corporate sectors, and a resilient external sector.

Government bond yields have softened significantly since the last policy due to both global and domestic factors. Expectations of monetary policy easing by the Fed and other major global central banks have led to softening of bond yields across the globe, including India, according to Bank of Baroda in a research note.

On the domestic side, lower borrowings by the government, buying by FPIs and soft global oil prices have led to a downward bias for India’s benchmark 10-year yield.

Since June this year, the yield on 10-year G-sec has fallen to sub-7%, currently.

India's retail inflation surged to a four-month high in June, driven by a rise in the prices of vegetables. The Consumer Price Index-based inflation rose to 5.08% in June, compared to 4.75% in May, led by vegetable prices.

CPI inflation is expected to remain below or close to 5.0% in the remaining months, except for September and October, the State Bank of India said in a note. The MPC stated in its June resolution that there is a need to closely monitor the arrivals of key rabi crops, particularly pulses and vegetables, given the recent sharp upturn in prices. Normal monsoons, however, could lead to a softening of food inflation pressures over the course of the year, it said.

The cumulative kharif sowing stood at 905 lakh hectares as of Aug. 2, 2024, 82% of the full-season normal acreage and 3% higher than the corresponding date of the previous year, according to data from the Ministry of Agriculture.

Going forward, the Indian Metrology Department, or IMD, forecasts above-normal rainfall, which augurs well for replenishment of reservoir levels and further progress of kharif sowing.

India’s Monetary Policy Committee will announce its key repo rate on Friday after it met from Aug. 6, its first meeting after the final Union Budget and the Fed signalling chances of a rate cut in September.

In India, inflation has seen a modest uptick since the last policy meeting in June, while economic growth remains robust. 

All economists polled by Bloomberg expect the MPC to maintain status quo for the eighth straight meeting. The benchmark lending rate, or the repo rate, will remain unchanged at 6.5%.

Its also the current MPC's last meeting before its term ends and new members are appointed. During the tenure of the current MPC, the 4% target has eluded the committee, but for justifiable reasons such as the ongoing volatility caused by vegetable prices currently. 

Enduring upward food price pressure on headline inflation will likely keep the MPC cautious in August, stated a research note by Shreya Sodhani, regional economist at Barclays. "We expect the MPC to keep policy settings unchanged in a 4-2 vote," she said, noting that the steady growth and lack of urgency to cut rates could potentially delay the first rate cut beyond December.