The perceptible decline in India's household savings from a pandemic-era build-up is merely a move towards the historical average.
According to RBI Deputy Governor Michael Patra, India's savings during the pandemic rose to 11% of the GDP as people had fewer avenues to spend, as well as built up "precautionary savings". When restrictions were eased, people went out to spend.
"If you see absolute level of savings, it has gone up by 14% in FY23. There is an increase from 4.2% in Q1 FY23 to 7% in Q4 FY23," Patra says. The historical average of household savings is 7.5% of GDP.
That said, there has been an increase in financial liabilities of households.
"Most of households’ financial liability is towards housing," Patra says. "You’re likely to see investments picking up next year."
The Reserve Bank of India doesn't have a mechanism to defend the rupee at a certain level against the US dollar, Governor Shaktikanta Das says.
"Our objective and intervention is to prevent excessive volatility. The aim is to ensure orderly appreciation or depreciation of the rupee," Das says. "The RBI's policy on currency is time-tested."
The Reserve Bank of India doesn't see any major problem as far as central government’s finances are concerned, Governor Shaktikanta Das says.
"There was fiscal expansion during the Covid-19 pandemic, which was very calibrated and targeted," Das says. "After the pandemic, the government has announced fiscal consolidation path. The government has said it will stick to the fiscal consolidation roadmap."
Addressing the issue of high growth of unsecured credit---personal loans, credit cards, etc.---RBI Governor says banks should watch the trends and take whatever measures required to strengthen their internal suveillance systems.
That doesn't mean a balance sheet problem for lenders.
"All parameters for banks, NBFCs are better. The Gross NPA figures, based on unaudited numbers, is also better," Das says. "Our objective is that we have to be mindful of what can pose a challenge going forward."
Separately, RBI Deputy Governor Swaminathan Janakiraman says central bank has issued a system-level advisory so that banks, NBFCs strengthen measures and grow their portfolios sensibly.
The year-on-year growth in retail credit has been close to 30% over last couple of years. On average basis, unsecured retail credit has grown at 23%. The rest of credit growth is at 12-14%.
"Growth in unsecured retail credit has been an outlier. This particular segment is showing far greater growth because of digital enablement," he says. "When we see outliers, they are reached out to separately. No measures are being announced at this moment. It is just an advisory."
The open market operations are meant primarily to manage liquidity and not bond yields, RBI Governor Shaktikanta Das says.
"The OMO is not a yield control or management instrument," Das says. "We use one instrument for one objective."
"What we’re doing on liquidity is because of the domestic situation (bank liquidity). The pressure on exchange rate because of the dollar index is managed through reserves."
"We would not like to do micromanagement of liquidity in individual banks. It is for banks to manage their liquidity in the most efficient way possible," Das says. "We have voiced our view to the banks and it is for banks to take the cue."
Our liquidity management has nothing to do with global bond yields, RBI Governor Shaktikanta Das says.
OMO will be done via an auction process and not through NDS-OM
Liquidity management will be consistent with monetary policy stance
Our bond yields are determined primarily by domestic factors
US bond yields rising does lead to currency depreciation in EMs
India’s forex reserves are significant and give market confidence
RBI does intervene in the currency market to reduce volatility
Liquidity in India's banking system went into deficit mode in the last 2-3 weeks because of advance tax and GST payments, but overall, liquidity is in surplus, RBI Governor Shaktikanta Das says in post-policy presser.
"There is a substantial amount of liquidity built up due to withdrawal of Rs 2,000 notes," Das says. "Government spending has picked up and will pick up and result in liquidity build up."
"Currency in circulation is set to go up because of festive season. We have to be watchful and have active liquidity management."
Domestic economic activity continues to be resilient. India poised to become new growth engine of the world.
Declining core inflation is a silver line, but headline CPI inflation remains vulnerable to recurring and overlapping food price shocks.
MPC remains highly alert and won’t hesitate to take timely and appropriate action if situation warrants.
It is emphatically reiterated that inflation is 4% and not 2-6%. Hence, monetary policy needs to remain actively disinflationary at the current juncture.
Liquidity will be actively managed consistent with monetary policy stance. OMO sales will be undertaken as necessary.
Banks with surplus funds are encouraged to lend in the interbank call market for better returns instead of passively parking them in SDF.
Financial sector balance sheet remains robust. While RBI is closely monitoring emerging trends, banks and NBFCs are expected to strengthen internal surveillance mechanisms and institute suitable safeguards wherever necessary.
Financial stability is fundamental to price stability and growth.
External sector is eminently manageable.
Here's what RBI Governor Shaktikanta Das said at the opening of the post-monetary policy press conference:
The Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth and robust earnings growth. The credit growth is broad-based and backed by the strong fundamentals of financial institutions. The financial indicators of non-banking financial companies are also in line with that of the banking system as per the latest available data for June 2023.
Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress.
Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interest. The need of the hour is robust risk management and stronger underwriting standards.
"I would like to emphatically reiterate that inflation target is 4% and not 2-6%," RBI Governor Shaktikanta Das says in his monetary policy speech on Friday. "The aim is to align inflation to target on durable basis while supporting growth."
That said, the Indian economy continues to forge ahead in a challenging global environment, he says. Growth remains on track, but declining trend in inflation was interrupted in August.
"We remain vigilant of evolving inflation dynamics," the RBI governor says.
India's inward remittances have risen 5.8% YoY in Q1 FY24, while current account deficit has declined to 1.1% of GDP. Moreover, the forex reserves grew by a net $24.4 billion.
Inflows under external commercial borrowing has seen a turnaround, with $4.5 billion in April-August. As much as 60% of amount raised through ECB was for capex. FPI flows have seen significant turnaround in FY24 with net inflows of $20.3 billion up to September 2023. The net FDI moderated to $5.8 billion in April-July.
Some components of the personal loan segment must be monitored for any signs of incipient stress, RBI Governor Shaktikanta Das says.
Certain components of personal loans are recording very high growth. The RBI is closely monitoring evolving situation and will act proactively in maintaining financial stability, he says.
India's credit growth is broad-based, backed by strong fundamentals of financial institutions, but there is need for robust risk management and stronger underwriting standards, Das says.
The banking regulator has also decided to permit NBFCs in middle and base layers to use credit risk mitigation instruments. Credit risk mitigation instruments are used to reduce counterparty exposure under the credit concentration norms. So far, only NBFCs in upper layers were allowed to use these instruments.
Banks, which have surplus funds, should consider looking at lending to interbank call market rather than passively placing funds under Standing Deposit Facility, RBI governor says.
The incremental cash reserve ratio, or ICRR, has impounded Rs 1.1 lakh crore from the banking system.
The moderation in excess liquidity conditions has resulted in greater recourse to MSF by banks.
Elevated levels of MSF borrowing amidst excess funds being placed under SDF is emblematic of skewed liquidity position among banks.
"It is imperative that banks assess their actual liquidity requirements and bid under the VRRR (variable rate reverse repo) auction," the RBI governor says. "Release of the remaining ICRR funds and pick up in govt spending will ease liquidity conditions."
“It’s a turning pitch and we will play our shots carefully," RBI's Das says on bank liquidity management. "We may have to consider OMO (open market operations) sales of government securities to manage liquidity. The timing and quantum of such operations will depend on the evolving liquidity conditions."
The Reserve Bank of India estimates the retail inflation, measured by the consumer price index, at 5.4% in FY24. The CPI inflation is seen at 6.4% in Q2, 5.6% in Q3 and 5.2% in Q4. India's retail inflation is seen at 5.2% in Q1 FY25.
Core inflation softened to 4.9% during July and August, and has eased by 140 bps from its recent peak in January.
"There is further progress of anchoring of inflation expectations which have entered single-digit zone for first time since the pandemic," Das says.
Heightened inflation levels were largely driven by food prices. Vegetables contributed to a third of CPI inflation in July and a fourth in August. Further disinflation of core component is critical for price stability.
"(RBI) must monitor incoming data and outlook to clearly delineate durable components of price shocks from transitory ones," Das says.
Throughout much of the third quarter, food inflation pressures may not see sustained easing, as external pressures continue to remain volatile, RBI governor says.
"The monetary policy must be in absolute readiness to prevent spill-overs from food, fuel price shocks," Das says. "These are non-negotiable necessities."
The Reserve Bank of India expects the Indian economy to clock a real GDP growth of 6.5% in FY24. Asia's third largest economy is estimated to grow at 6.5% in July-September 2023, 6% in October-December 2023 and 5.7% in January-March 2024.
The economy is seen as expanding at 6.6% in the first quarter of FY25.
The global economy is slowing under impact of tight financial conditions, RBI Governor Shaktikanta Das says.
Headline inflation is easing, but rules above target in major economies. The tight monetary policy stance could persist longer than previously estimated globally, he says.
In contrast to the global trend, domestic growth shows resilience amidst strong domestic demand, Das says.
RBI Governor Shaktikanta Das says the recurring large overlapping food price shocks can impart generalisation and persistence to headline inflation.
Vegetable prices corrected partly in August and are expected to ease further in September. Silver lining in inflation outlook is declining core inflation. Overall inflation outlook clouded by fall in Kharif sowing. The transmission of 250 basis-point rate hike in bank loans and deposits still incomplete, the governor says.
India's monetary policy committee has voted unanimously to keep policy repo rate unchanged at 6.5%. The MPC decided to remain focused on withdrawal of accommodation, with 5:1 votes.