The RBI monetary policy statement aims at making available sufficient liquidity to the productive sectors of the economy so that the pandemic-induced slowdown is ameliorated and the country springs back to a high growth trajectory as soon as possible.
Dr Manas R Das
RBI announced the Resolution of the Monetary Policy Committee (MPC) (meeting held during April 5-7) on April 7. The MPC resolved to maintain status quo, i.e., keep the policy repo rate under the Liquidity Adjustment Facility (LAF) unchanged at four percent. Consequently, the Reverse Repo Rate under the LAF remained unchanged at 3.35%, and the Marginal Standing Facility (MSF) Rate and the Bank Rate at 4.25% each.
In addition, the “accommodative” stance of the monetary policy was retained till growth revives on a “durable” basis and the economic impact of COVID-19 is mitigated. At the same time, in future, it would be ensured that inflation remains leashed within the target.
The statement projects the retail inflation at five percent for 2020-21 Q4. For 2021-22, the projections are as follows: 5.2% in Q1, 5.2% in Q2, 4.4% in Q3 and 5.1% in Q4, with risks broadly balanced.
The statementretains the earlier projection of real GDP growth for 2021-22 at 10.5%.Quarter-wise, the projected growth rates are: 26.2% in Q1, 8.3% in Q2, 5.4% in Q3 and 6.2% in Q4.
In the ‘Developmental and Regulatory Policies’ section, RBI decides, inter alia, as follows:
- Extension of the Targeted Long-Term Repo Operations (TLTRO) on Tap Scheme by a period of six months, i.e., till September 30, 2021. This will ensure adequate liquidity for banks, corporates and Non-Banking Financial Companies (NBFCs).
- Extending fresh support of Rs.50,000 crore to the All-India Financial Institutions for new lending in 2021-22. Accordingly, National Bank for Agriculture and Rural Development will be provided a Special Liquidity Facility (SLF) of Rs.25,000 crore for a period of one year to support agriculture and allied activities, the rural non-farm sector and NBFC-Micro Finance Institutions. SLF of Rs.10,000 crore will be extended to National Housing Bank for one year to support the housing sector. In order to meet the funding requirements of Micro, Small and Medium Enterprises, Small Industries Development Bank of India will be sanctioned Rs.15,000 crore for a period of up to one year. All the three facilities will be available at the prevailing policy repo rate. This will support bank lending to the above-mentioned sectors.
- Constitution of a Committee to undertake a comprehensive review of the working of Asset Reconstruction Companies (ARCs) in the financial sector ecosystem and recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector. This seems to be the first step towards setting up of a national ARC as announced in the Union Budget 2021-22.
- Extension of on-lending by banks to NBFCs for specified priority sectors by six months, i.e., up to September 30, 2021. This would ensure more loans to the poor.
- Enhancement of the loan limit from Rs.50 lakh to Rs.75 lakh per borrower against the pledge/hypothecation of agricultural produce backed by Negotiable Warehouse Receipts (NWRs)/electronic-NWRs issued by the warehouses registered and regulated by Warehousing Development and Regulatory Authority. This will boost agricultural credit flow to farmers.
- RBI will construct and periodically publish a “Financial Inclusion Index” in order to measure the extent of financial inclusion in the country.
- Allowing the unutilized External Commercial Borrowing to be retained in term depositsuntil March 2022 will give more flexibility in funds management for businesses affected by the pandemic.
- Some measures related to electronic payments systems announced will boost digital transactions.
In essence, the RBI monetary policy statement aims at making available sufficient liquidity to the productive sectors of the economy so that the pandemic-induced slowdown is ameliorated and the country springs back to a high growth trajectory as soon as possible.
About the Author:
Dr. Manas R. Das is a former senior economist of State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medalist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of the Indian Institute of Bankers. He has won several awards, besides being a prolific writer.