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Feb’21 RBI Policy Highlights

Writer # Indiabonds | March 5, 2021

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The RBI’s Monetary Policy Committee (MPC) conducted its 5th bi-monthly monetary policy meeting from February 3-5, 2021

The Monetary Policy Committee (MPC) at its meeting today decided to:

  • Keep the policy repo rate unchanged at 4.0%
  • Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand unchanged at 4.25%
  • The reverse repo rate under the LAF stands unchanged at 3.35%.
  • The MPC also decided to continue with the accommodative stance as long as necessary – at least during the current financial year & into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.

Part A: RBI’ s Policy decision Rationale

1. Inflation

Retail inflation eased below the upper tolerance level of 6% for the first time in the COVID-19 period in December 2020. Favorable base effects & a sharp fall in key vegetable prices accounted for 90% of the decline in headline inflation during November – December 2020. By March 2021, the government will be reviewing the inflation target for the next 5 years.

The MPC expects CPI outlook to be shaped by several factors such as:

  • Prospects of a good rabi harvest, large winter arrivals of key vegetables & softer vegetables prices in the near future.
  • Historic highs in petroleum product prices due to surge in international crude prices in recent months & the high indirect taxes, both in Centre & States.
  • Upward pressure due to broad-based escalation in cost-push pressures in services & manufacturing prices due to increase in industrial raw material prices.

Based on the above factors, the MPC has provided the following outlook for CPI Inflation:

CPI Inflation OutlookQ4:2020-21H1:2021-22Q3:2021-22
5th bi-monthly policy FY2020-215.2%5.0% – 5.2%4.3%

* Above mentioned values are CPI Inflation – Projections

2. Growth

The MPC expects real GDP to be based on the following factors:

  • Resilient rural demand based on good prospects of agriculture along with strengthening of urban demand.
  • Consumer confidence has revived & business expectations of manufacturing, services & infrastructure are expected to remain upbeat.
  • Fiscal stimulus support under AtmaNirbhar 2.0 & 3.0 schemes by the government will likely increase public investment, although private investment remains sluggish amidst low-capacity utilization.
  • Announcements made in the Union Budget 2021-22 with focus on sectors such as health & well-being, infrastructure, innovation & research and others should also help accelerate the growth momentum.

Based on the above factors, the MPC has provided the following outlook for Real GDP growth:

GDP Growth OutlookProjections
4th bi-monthly policy FY2020-2110.50%8.30% – 26.20%6.00%

3. Liquidity

  • Domestic financial conditions remained easy in December 2020 & January 2021 and systemic liquidity continued to be in large surplus.
  • Corporate bond issuances rose significantly to Rs 5.8 lakh crore during April-December 2020 from Rs 4.6 lakh crore in the year-ago period.
  • India’s foreign exchange reserves were US$ 590.2 billion (as on Jan 29), rising by US$ 112.4 billion over end-March 2020.

RBI Governor gave assurance the stance of the liquidity management continues to be accommodative. RBI announced liquidity measures which are explained in Part B.

4. Global Economy

The global economic recovery slackened in Q4 of 2020 as several countries witnessed a second wave of COVID-19 infections including new virus strains. The ongoing vaccination drives are expected to abate risks to the recovery & economic activity may gain momentum in H2 2021. Inflation has remained benign on weak aggregate demand, although rising commodity prices carry upside risks. Global financial markets remain buoyant, supported by highly accommodative monetary policies, abundant liquidity and optimism around the vaccine rollout.

Part B: Key Statements on Developmental and Regulatory Policies:

1. TLTRO on Tap Scheme – Inclusion of NBFCs

Given that NBFCs are well recognised conduits for reaching out last mile credit, it is now proposed to provide funds from banks under the TLTRO on Tap scheme to NBFCs for incremental lending. Investments made by banks under this facility can be classified as held to maturity (HTM) even above the 25% of total investment permitted to be included in the HTM portfolio.

2. Restoration of Cash Reserve Ratio (CRR) in two phases beginning March 2021

Gradually restore the CRR in two phases and in a non-disruptive manner. Banks would now be required to maintain the CRR at 3.5 % of NDTL effective from March 27, 2021 and 4.0% of NDTL effective beginning May 22, 2021.

3. Marginal Standing Facility (MSF) – Extension of Relaxation

With a view to providing comfort to banks on their liquidity requirements, it has now been decided to continue with the MSF relaxation for a further period of six months, i.e., up to September 30, 2

4. SLR Holdings in Held to Maturity (HTM) category

RBI has now decided to extend the dispensation of enhanced HTM of 22% up to 31st Mar 2023 (from 31st Mar 2022 earlier) to include securities acquired between 1st Apr 2021 and 31st Mar 2022. The HTM limits would be restored from 22% to 19.5% in a phased manner starting from the quarter ending 30th Jun 2023.

5. Credit to MSME Entrepreneurs

In order to incentivize new credit flow to the MSME borrowers, Scheduled Commercial Banks will be allowed to deduct credit disbursed to ‘New MSME borrowers’ from their NDTL for calculation of the Cash Reserve Ratio (CRR).

6. Review of the Regulatory Framework for Microfinance

RBI has proposed to review the regulatory framework for NBFC – Micro Finance Institutions (NBFC-MFIs). The framework aims to be uniformly applicable to all regulated lenders in the microfinance space including scheduled commercial banks, small finance banks and NBFC-Investment and Credit Companies, rather than for NBFC-MFIs alone. Accordingly, the RBI will come out with a consultative document harmonising the regulatory frameworks for various regulated lenders in the microfinance space in March 2021.

7. Constitution of an Expert Committee on Primary (Urban) Co-operative Banks (UCBs

RBI has decided to set up an Expert Committee on UCBs involving all stakeholders in order to provide a medium- term road map to strengthen the sector, enable faster rehabilitation/resolution of UCBs, as well as to examine other critical aspects relating to these entities.

8. Allowing Retail Investors to Open Gilt Accounts with RBI

As part of continuing efforts to increase retail participation in government securities and to improve ease of access, RBI has decided to provide retail investors online access to the G- Sec market, both primary and secondary, along with the facility to open their gilt securities account (‘Retail Direct’) with the RBI.

9. Foreign Portfolio Investors (FPIs) Investment in Defaulted Bonds

In order to further promote investment by FPIs in corporate bonds, RBI has proposed that FPI investment in defaulted corporate bonds be exempted from the short-term limit and the minimum residual maturity requirement under the Medium-Term Framework.