August 2023 RBI Monetary Policy: Repo Rate and Incremental CRR

Utkarsh Classes Last Updated 07-12-2023

August 2023 RBI Monetary Policy: Repo Rate and Incremental CRR

Economy 8 min read

The Monetary Policy Committee (MPC) headed by the Reserve Bank of India (RBI) Governor Shaktikanta Das on 10 August 2023 left the key policy repo rate unchanged at 6.5%. However the governor announced an Incremental Cash Reserve Ratio(I-CRR) of 10% for banks to suck out the excess liquidity in the banking sector due to the deposition of Rs 2000 notes in the banking system.

In the last bi monthly policy announced by RBI in June 2023 ,the RBI had left the repo rate unchanged at 6.5%. The RBI has raised the repo rate by 250 basis points since May 2022. (100 basis points is equal to 1%)

Major Points of the 2023 August bi -monthly monetary policy

Incremental Cash Reserve Ratio (I-CRR) of 10%

The RBI has directed the banks to maintain an Incremental Cash Reserve Ratio (I-CRR) of 10% on the increase in their net demand and time deposit liabilities (NDTL) between 19 May to 28 July 2023 to withdraw excess liquidity from the banking system . This will take into effect from 12 August 2023. RBI said that it will review the I-CRR again in September.

The main reason for RBI imposing I-CRR is to reduce the lending ability of the banks so as to control inflation. The I-CRR is expected to take out Rs one lakh crore to 1.5 lakh crore from the market . At present the surplus liquidity in the market is expected to be Rs 2.3 lakh crore. One of the reasons for the banks having surplus liquidity is the deposit of Rs 2000 rupees by the public .On 19th May RBI announced that it is withdrawing Rs 2000 notes from circulation and gave the public time to deposit the notes in the bank by 30th September 2023.

Inflation outlook

The Reserve Bank of India has revised the retail inflation projections for 2023-24 at 5.4 per cent, against 5.1 per cent it projected in its previous monetary policy meeting in June. The inflation figure is measured on the Consumer Price index(CPI).

No change in GDP growth forecast

The RBI has projected real GDP growth for 2023-24 at 6.5 per cent . It expects the

Q1(April -June ) growth rate at 8.0 per cent;
Q2(July -September) at 6.5 per cent;
Q3(October-December) at 6.0 per cent; and
Q4(January- March) at 5.7 per cent.

The RBI governor said that India is contributing approx 15% to global growth.

In 2022-23 the real GDP growth rate of India was 7.2%.

RBI raises per transaction limit for UPI Lite

Reserve Bank has proposed to increase the per transaction payment limit to Rs 500 for UPI Lite in offline mode from Rs 200.

Policy rates of RBI

Policy Repo Rate - 6.5% (no change). It is also called the overnight lending rate . It is the rate at which RBI provides loans to the banks for 24 hours .

Standing Deposit Facility (SDF) -6.25% (no change). It is a facility where RBI accepts short term (24 hours) deposits from the banks . It is always 0.25% less than the Policy repo rate .

The main difference between report and SDF is that when RBI accepts deposits from banks under repo it has to provide collateral in the form of government security (bonds ) to the bank.

In SDF RBI does not provide any collateral to the banks.

Fixed Reverse Repo Rate - 3.35% (no change).It is the rate at which RBI accepts short term (24 hours) deposit from the banks .

Marginal Standing Facility (MSF)- 6.75% . It is always 0.25% above the policy repo rate.

Bank Rate - 6.75%(no change) . It is the rate at which RBI provides long term loans to the banks .Bank rate and marginal standing facility are always kept the same by the RBI.

Reserve Ratios

Cash Reserve Ratio(CRR)- 4.50% . Banks have to keep a certain percentage of their Net Time and Demand Deposit Liabilities (NDTL) with the RBI in the form of cash called as CRR.

Statutory Liquidity Ratio(SLR)-18% (no change). Banks have to keep a certain percentage of their Net Time and Demand Deposit Liabilities (NDTL) with themselves in the form of cash ,gold or approved government securities.

What is the Monetary Policy Committee?

Under Section 45ZB of the amended RBI Act 1934, the Central government is empowered to constitute a six-member Monetary Policy Committee (MPC) to determine the policy interest rate required to achieve the inflation target.
The first such MPC was constituted on September 29, 2016.

As per the RBI Act, the MPC must meet a minimum of four times in a financial year.