RBI Governor makes key announcement: Policy Repo rate unchanged at 4 per cent

Newsroom24x7 Network

Mumbai: The Monetary Policy Committee of Reserve Bank of India met for three days from 4th August for it second meeting of 2020-21, the 24th under its aegis, completing four years of its operation under the new monetary policy framework and the MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent and continue with the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward.

Other Decisions

The Marginal Standing Facility (MSF) rate and the Bank rate remain unchanged at 4.25 per cent. The reverse repo rate stands unchanged at 3.35 per cent.
global economic activity has remained fragile and in retrenchment in the first half of 2020. A renewed surge in COVID-19 infections in major economies in July has subdued some early signs of revival that had appeared in May and June.
The World Trade Organisation (WTO) has estimated that the volume of merchandise trade shrank by 3.0 per cent year-on-year in Q1 and early estimates suggest a fall of 18.5 per cent in Q2.
In India too, economic activity had started to recover from the lows of April-May; however, surges of fresh infections have forced re-clamping of lockdowns in several cities and states. Consequently, several high frequency indicators have levelled off.
The agriculture sector’s prospects are strengthened by the progress of the south-west monsoon and expansion in the total area sown under kharif crops by 13.9 per cent up to July 31 over last year.
Industrial production remained in contraction albeit at a moderated pace in May. The manufacturing purchasing managers’ index (PMI) shrank in July for the fourth consecutive month.
India’s merchandise exports contracted for the fourth successive month in June 2020, although the pace of fall moderated.
Imports fell sharply in June in a broad-based manner, reflecting weak domestic demand and low international crude oil prices.
The merchandise trade balance recorded a surplus in June (US$ 0.8 billion), after a gap of over 18 years.
Net foreign direct investment moderated to US$ 4.4 billion in April-May 2020 from US$ 7.2 billion a year ago. In 2020-21 (April-July), net foreign portfolio investment (FPI) in equities at US$ 5.3 billion was higher than US$ 1.2 billion a year ago.
In the debt segment, there were outflows of US$ 4.4 billion during the same period as against inflows of US$ 2.0 billion a year ago. Net investment under the voluntary retention route increased by US$ 0.9 billion during the same period.
India’s foreign exchange reserves have increased by US$ 56.8 billion in 2020-21 so far (April-July) to US$ 534.6 billion (as on July 31, 2020) – equivalent to 13.4 months of imports. The ratio of foreign exchange reserves to external debt has gone up from 76.0 per cent at the March 2019 to 85.5 per cent at the end of March 2020.

Outlook

Supply chain disruptions on account of COVID-19 persist, with implications for both food and non-food prices. A more favourable food inflation outlook may emerge as the bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement.
Nevertheless, upside risks to food prices remain.
The recovery of the rural economy is expected to be robust, buoyed by the progress in kharif sowing.
Manufacturing firms expect domestic demand to recover gradually from Q2 and to sustain through Q1:2021-22. On the other hand, consumer confidence turned more pessimistic in July relative to the preceding round of the Reserve Bank’s survey.
External demand is expected to remain anaemic under the weight of the global recession and contraction in global trade.
Taking into consideration the above factors, real GDP growth in the first half of the year is estimated to remain in the contraction zone. For the year 2020-21 as a whole, real GDP growth is also estimated to be negative.

Impact of the Monetary and Liquidity Measures taken by the RBI

Lower borrowing costs have led to record primary issuance of corporate bonds of ₹2.09 lakh crore in the first quarter of (April-June) 2020-21. In particular, market financing conditions for NBFCs, which had become challenging, have largely stabilised in the wake of targeted policy measures.
Abundant liquidity has supported other segments of financial markets too. In particular, MFs have stabilised since the Franklin Templeton episode. Assets under management of Debt MFs, which fell to ₹12.20 lakh crore as on April 29, 2020, recovered and improved to ₹13.89 lakh crore as on July 31, 2020.
Non-food bank credit has slowed to 5.6 per cent (As on 8 July 17), credit to NBFCs is growing at 25.7 per cent in June, loans to services at 10.7 per cent, and to housing at 12.5 per cent. Monetary transmission has also improved considerably.

Additional Special Liquidity Facility (ASLF)

Additional special liquidity facility of ₹10,000 crore will be provided at the policy repo rate consisting of: ₹5,000 crore to the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies (HFCs); and ₹5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity.
Keeping in view the disruptions caused by COVID-19 have led to heightened financial stress for borrowers across the board, it has been decided to provide a window under the June 7th Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures – without change in ownership – as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions.

Restructuring of MSME Debt

A restructuring framework for MSMEs that were in default but ‘standard’ as on January 1, 2020 is already in place. The scheme has provided relief to a large number of MSMEs. With COVID-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support. Accordingly, it has been decided that stressed MSME borrowers will be made eligible for
restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021.

Advances against Gold Ornaments and Jewellery

As per extant guidelines, loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 per cent of the value of gold ornaments and jewellery. With a
view to mitigating the impact of COVID-19 on households, it has been decided to increase the permissible loan to value ratio (LTV) for such loans to 90 per cent. This relaxation shall be available till March 31, 2021.

Other Measures

Introduction of an automated mechanism in e-Kuber system to provide banks more flexibility/discretion in managing their liquidity and maintenance of cash reserve requirements.
To enhance safety of cheque payments, it has been decided to introduce a mechanism of Positive Pay for all cheques of value ₹50,000 and above. This will cover approximately 20 per cent and 80 per cent of total cheques by volume and value, respectively.
A scheme of retail payments in offline mode using cards and mobile devices, and a system of on online dispute resolution (ODR) mechanism for digital payments is also being introduced.