“We are nimble and swift to the liquidity risk in India”  Shaktikanta Das, RBI Governor

Shaktikanta Das, the head of India’s central bank RBI, spoke about the macroeconomic risks facing India and the world. The Indian central bank kept interest rates unchanged with the Repo Rate at 6.5 percent. The MSF also remained unchanged at 6.75 percent. Shaktikanta mentioned that although inflation will ease this year, headline inflation will be volatile due to food prices. Global growth will be steady according to him. Inflation in India will ease this quarter but remain elevated overall this year. The RBI governor especially mentioned the risk of high public debt, including that in advanced countries. The Middle Road had highlighted the high risk of public debt, especially in the United States, as a key risk going forward. The RBI governor was very bullish on India’s GDP growth rate – India’s GDP growth next year is projected to be 7 percent. India’s current account deficit contracted by 1 percent of GDP in Q2 2023. The services sector remains resilient as the largest contributor to India’s GDP, with remittances as the second largest sector. According to the World Bank, India is expected to attract $135 billion in remittances in 2024, though remittances are forecasted to fall 5 percent due to slowdowns in the US, Euro Area and GCC Countries. Last year, India attracted $125 billion in remittances. India consumption story looks intact with robust asset growth especially in the affordable housing segment.

RBI hinted that they would use a mix of liquidity management tools to regulate liquidity, especially at the shorter end of the yield curve. Experts speaking with CNBC TV-18 suggested using various liquidity management tools to address frictional and durable liquidity concerns. This could be a repo cut, or incremental CRR cuts or open market operations. 

Open Market Operations (OMOs) are either permanent or temporary. Globally central banks use this tool to regulate liquidity within the economy. The FED uses Repo and Reverse Repo Rates to regulate short-term rates example effective fed funds rate or overnight lending rates between banks. Outright purchase or sale of assets are permanent OMOs. Asset purchases increase aggregate supply of reserves i.e. money supply. Also known as quantitative easing, these operations are used when the interest rates are near zero making other monetary tools ineffective.

 

What are Reserves  and Repo Rates ?

• Cash banks hold either in the currency form in vaults or with the central banks.
• Central banks infuse reserves into the system through the repo market.
• Repo or repurchase agreements are short term secured loans where the party buys back the securities from the other party at a specific price at a specific time.
• Central bank buys securities it is increasing the liquidity and reserves of the system.This change in the price is known as the repo rate.

• Check out the free sample lesson on Open Market Operations by The middle Road here. 

To know more about the working of central bank working, watch The middle Road video on central banks below. 

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India will attract foreign funds into the bond market due to the inclusion of India in the JP Morgan Government Bond Index – Emerging Markets. According to India’s finance minister, this inclusion might drive $23 billion inflows into India. However, there is volatility within the overnight lending rates and Shaktikanta Das’ statement has not clearly indicated the Indian central bank’s stance in a decisive manner. According to CNBC -TV18 analysis, RBI monetary policy is very even handed. 

The middle Road’s view is to cut repo rate if core inflation eases out over few months to address liquidity concerns.  

With forex reserves at $622.5 billion, some regulations were proposed for updating the regulatory framework around electronic trading platforms. Residents of India can now hedge gold prices in the over-the-counter (OTC) market in IFSC. There are also plans to enhance transparency of loans in the MSME segment through disclosure of all charges. Steps are being taken to streamline Aadhaar and digital payments through better and alternative authentication mechanisms. With the emergence of many leading technological innovations, SMS as the only means of authentication for digital transactions needs to be expanded with more technological mechanisms. Shaktikanta Das message on inclusive growth in India is well appreciated and it remains to be seen how this growth will unfold in India as we advance.  

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