RBI Monetary Policy
STORIES, ANALYSES, EXPERT VIEWS
The Reserve Bank of India’s (RBI) monetary policy Friday stuck to the expected script, with a slight surprise of an enhanced outlay for its G-SAP (government security acquisition programme). The central bank announced fresh measures to ensure cheap liquidity supply (especially, this time round, to contact-service industries). Below is a summary of key highlights.
Policy rates untouched
The monetary policy panel decided unanimously to leave the repo rate, or the rate at which RBI lends overnight funds to banks, unchanged at 4%. The reverse repo rate, or the interest it pays on surplus funds absorbed from banks, was left unchanged at 3.35%. So long as the covid pandemic casts a shadow of uncertainty, the Mint writes “credit conditions will continue to need RBI support.”
Real GDP growth projected at 9.5% in 2021-2022
The RBI expects real GDP growth at 9.5 percent in 2021-2022 consisting of 18.5 percent in first quarter, 7.9 percent in the second quarter, 7.2 percent in the third quarter and 6.6 percent in the forth quarter of 2021. The RBI had earlier forecasted 10.5 percent GDP growth for 2021-2022. For Q1, RBI had expected 26.2 percent, much higher than the now revised figure. RBI had also lower forecast for Q2 at 7.9 vs 8.3 percent forecasted earlier. The central bank had pegged Q3 growth at 5.4 percent and Q4 at 6.2 percent, both lower than the now revised growth figure.
Risks to GDP: The monetary policy committee (MPC) highlights increased risks to growth. The rural sector that had played the economy’s saviour in FY21 has come under stress. The MPC points out that important rural demand indicators — tractor sales and two-wheeler sales — posted sequential declines in May. In the industrial sector, while mining and electricity segments have returned to their pre-pandemic level of activity, the manufacturing sector still lags behind. The moderation in manufacturing and services PMI was quite severe in May after several months of sustained expansion.
Factoring in this acute slowdown and the future uncertain trajectory, the MPC revised downwards its real GDP growth projection for FY22 from 10.5 percent earlier to 9.5 percent. It has also stressed that at this juncture policy support from all sides, including fiscal and sectoral (and not only monetary), is essential to nurture recovery and expedite return to normalcy.
In the circumstance, the trajectory, the economy takes, in the view of The Mint “would depend not just on quelling the second wave (which is thankfully off its peak and in decline), but guarding against a potential third one, now that it's getting clearer that the virus's Delta variant represents a bigger threat than estimated earlier. The possibility of more waves would mean that covid curbs will have to persist and large parts of our economy will function in fits-and-starts.”
CPI inflation projection rate at 5.1% for FY22
Governor Das announced a projection for Consumer Price Index (CPI) inflation at 5.1 percent for FY 2021-22. Das pegged the quarter wise inflation projections for FY22 at 5.2 percent in Q1, 5.4 percent in Q2, 4.7 percent in Q3 and 5.3 percent in Q4, with risks broadly balanced. Normal monsoon and business resilience can provide a tailwind to economic recovery. With a normal monsoon, the comfortable buffer should keep food prices comfortable, he said. However, RBI noted that rising crude prices and higher logistic costs can push up prices and core prices may remain elevated. "Global demand condition is expected to improve with fiscal stimulus and higher vaccination," Das noted.
According to experts, despite a significant increase in inflationary risks on the back of rising global commodity prices and disruptions to supply chains, the MPC has surprisingly just slightly revised its inflation projection for different quarters of FY22. For the year as a whole, it expects CPI inflation at 5.1 percent, which appears to be a gross underestimation. This warrants a close watch, cautions the Mint. “Should price levels threaten to go out of control, RBI may be compelled to revisit its accommodative policy stance that has so far kept credit cheap.”
Forex Reserves
Governor Das said that the RBI is actively engaged in forex market as strength of financial system is crucial for fighting against pandemic. "The exchange rate is stable despite global spillovers and the forex reserves have risen to $598 billion. We are within striking distance of reaching $600 billion on Forex Reserves," he said.
External pressures
Firming global crude oil prices and reviving demand in Western economies risk spilling over to the Indian economy in the form of price pressures. The impact of overseas trends needs to be kept under watch, as the US central bank slowly begins to unwind a few of its extraordinary covid provisions. “Dollar inflows and outflows may follow a different pattern from what was seen last year, and RBI may have to grapple with 'impossible trinity' trade-offs accordingly.”
Measures will support the benign interest rate environment
To continue with its effective management of G-Sec yields so as to control the costs of borrowings for both government and the private sector, the RBI has announced another operation under G-SAP 1.0 to purchase government securities worth Rs 40,000 crore on June 17 and also announced G-SAP 2.0 for Q2, FY22 to conduct secondary market asset purchases worth of Rs 1.2 lakh-crore to support the market.
It has included State Development Loans (SDLs) in the G-SAP signalling its intent to make the SDLs an acceptable asset class in its liquidity operations. All these measures, according to Money Control “will support India’s benign interest rate environment unless there is a high impact event in the form of global crude price or the US treasury yield movement.”
Supporting small businesses
Furthermore, the RBI has taken important sector-specific measures like on-tap liquidity window (of Rs 15,000 crore) for contact-intensive sectors such as hotels, restaurants, tourism, aviation ancillary services, etc. and enhanced its special liquidity facility to the SIDBI by Rs 16,000 crore to support the refinancing needs of the MSMEs.
The RBI has responded well to the newly-developed stresses in small manufacturing units and their negative implications for the asset quality management (NPAs) of the lenders. To grant regulatory relief to lenders, it has expanded the coverage of borrowers under the resolution framework 2.0 and given permission to lenders to restructure loans of up to Rs 50 crore revising upwards its earlier threshold of Rs 25 crore. This loan restructuring is applicable to sectors that have again borne the brunt of the second wave such as the MSMEs, the non-MSME small businesses and individuals who had taken loans for business purposes.
Encouraging foreign portfolio investors
To encourage investment by foreign portfolio investors (FPIs) in India’s debt market, the RBI has granted permission to banks to place margins on behalf of their FPI clients for their transactions in government securities, state development loans, treasury bills, etc. within their credit risk management framework. This is expected to promote the ease of doing business for the FPIs.
Support to rural businesses
To help regional rural banks (RRBs) in their short-term resource raising efforts, the RBI has given them permission to issue certificates of deposits (CDs). Further, they are allowed to buy back their CDs before maturity, subject to certain conditions. By facilitating higher flexibility to the RRBs in their liquidity management, the RBI has supported the short-term funding requirements of rural businesses.
To conclude, Money Control says “the intense nature of the COVID-19 second wave has prompted the RBI to increase its dovish hold and to do ‘whatever it takes’ to support economic recovery.”
RBI doesn't endorse cryptocurrencies
At the post monetary policy presser, RBI Governor Shaktikanta Das put all speculations at rest with respect to the RBI stance on crypto. The Governor, replying to a question, clearly said the central bank has major concerns on cryptocurrency and the Mint Road has conveyed these concerns to the government. "There is no change in RBI’s position (with respect to crypto currencies). With regard to advice to investors, well, central banks don't give any investment advice. It's up to each investor to make his own appraisal, to do his own due diligence and take a very careful call with regard to his own investments," the Governor said.
This statement leaves no room for anyone to speculate.
The RBI's message is very clear. The central bank doesn't want to be seen as endorsing crypto. And investors, if they wish to, will have to deal in these instruments at their own risk. But here is the problem. Logically, something the central bank doesn't endorse and has "major concerns" about, will not be a safe business proposition for any regulated entity that operate under the RBI. If something goes wrong, banks will not have the backing of the regulator. No serious banker will indulge in such an asset willingly.
