All About 1st RBI monetary Policy for the FY 2021-22

RBI In its first monetary Policy meeting for the Financial Year 2021-22 decided to keep the policy rates unchanged and also continued to maintain the accommodative stance as long as necessary to sustain growth on a durable basis. The said meeting held for three days from 05^th April to 07^th April 2021 and the outcome of the meeting has come at 10AM on 07^th April 2021.

All Six members of the MPC unanimously voted for keeping the policy repo rate unchanged with the accommodative stance. Minutes of the said meeting will be published on 22^nd April 2021.

Policy has shown the concerns about growth on account of rising Covid cases in India and across the Globe and due to which, MPC has noted that there may be Supply side Pressure on Inflation with demand side pull at moderate level.

The Key Takeaways of the Meeting are as follows:

• In Order to continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward, RBI has decided to continue with the accommodative stance and policy rates (Repo, Rev Repo and MSF) remains unchanged to support the growth and aims to maintain Consumer Price Inflation (CPI) in line with the targeted levels.
• CPI Projection: Taking into consideration of Domestic outlook, RBI has Projected the CPI Inflation for Q4 of FY 2020-21 as 5% and 5.2%,5.2%,4.4% and 5.1% for the next quarters respectively for the FY 2021-22.
• GDP Projection: Projection of real GDP growth for 2021-22 is retained at 10.5 % consisting of 26.2 % in Q1, 8.3 % in Q2, 5.4 % in Q3 and 6.2 % in Q4.

Measures undertaken:

1.Liquidity Measures:

• It has been decided to Extend the earlier announced Targeted Long Term Repo Operations (TLTRO) on Tap scheme by a period of 6 months till 30^th Sep 2021. The Benefit of this scheme is to Provide the Liquidity to the Banks to deploy corporate bonds, commercial paper, and non-convertible debentures issued by eligible entities identified by RBI on recommendations made by Kamath committee. The investments made by the Banks with the liquidity availed are out of the purview if Large Exposure Framework (LEF) and Banks can classify them under HTM and are out of the ambit of Cap of 25% of Total Investments of the Bank.
• it has been decided to extend fresh support of ₹50,000 Cr to the All-India Financial Institutions (AIFIs) for new lending in 2021-22 to support the continued flow of Credit to real economy.

2. Regulation and Supervision:

• With a view to encourage their efforts for financial inclusion and to expand their ability to cater to the needs of their customers, including MSMEs, small traders and merchants, RBI has enhanced the limit of maximum balance per customer at end of the day from ₹1 lakh to ₹2 lakh for Payments Banks
• Proposed to constitute a Committee to undertake a comprehensive review of the working of ARCs in the financial sector ecosystem and recommend suitable 3 measures for enabling such entities to meet the growing requirements of the financial sector.
• With a view to ensure continued availability of credit NBFC for on lending to Agriculture, MSME and Housing sectors to aid faster economic recovery, it has been decided to extend the Priority Sector Lending (PSL) classification for lending by banks to NBFCs for ‘on-lending’ to the above sectors for six months, i.e., up to 30^th September 2021
• With a view to encourage farm credit to individual farmers against pledge/hypothecation of agricultural produce and leverage the inherent safety of Negotiable Warehouse Receipts (NWRs)/electronic-NWRs(e-NWRs) issued by the warehouses registered and regulated by Warehousing Development and Regulatory Authority (WDRA), it has been decided to enhance the loan limit from ₹50 lakh to ₹75 lakh per borrower.

3. Debt Management:

• An Advisory Committee Chaired by Shri Sudhir Shrivastava was constituted by the RBI in August 2019 to review the Ways and Means Advances (WMA) limits for State Governments/UTs and examine other related issues. The Committee has recommended an overall revised limit of ₹47,010 crore for all states, as against the current limit of ₹32,225 crore (fixed in February 2016), representing an increase of about 46% The committee also recommended the continuation of the enhanced interim WMA limit of ₹ 51,560 crore(60% above the current limits allowed by RBI of Rs 32,225 Cr) for a period of 6 months to 30^th Sep 2021.

4. Financial Inclusion:

• To measure the extent of financial inclusion in the country, the Reserve Bank will construct and periodically publish a “Financial Inclusion Index” (FI Index). The FI Index would be based on multiple parameters and shall reflect the broadening and deepening of financial inclusion in the country and the same will be published annually from July of every financial Year following March end.

5. Payment Systems:

• To reinforce this trend and encourage participation of non-banks across payment systems, it is proposed to enable, in a phased manner, payment system operators, regulated by the Reserve Bank, to take direct membership in Centralised Payment Systems (CPS). This facility is expected to minimise settlement risk in the financial system and enhance the reach of digital financial services to all user segments
• To incentivise the migration of PPIs to full-KYC, it is proposed to increase the limit of outstanding balance in such PPIs from the current level of ₹1 lakh to ₹2 lakh and proposed to make interoperability mandatory for full-KYC PPIs and for all acceptance infrastructure.
• As a confidence-boosting measure, it is proposed to allow the facility of cash withdrawal, subject to a limit, for full KYC PPIs of non-bank PPI issuers as well.

6. External Commercial Borrowings:

• Under the extant ECB framework, ECB borrowers are allowed to place ECB proceeds in term deposits with AD Category-I banks in India for a maximum period of 12 months. In view of the difficulty faced by borrowers in utilizing already drawn down ECBs due to Covid-19 pandemic induced lockdown and restrictions, it has been decided to relax the above stipulation as a one-time measure, with a view to provide relief. Accordingly, unutilised ECB proceeds drawn down on or before March 1, 2020 can be parked in term deposits with AD Category-I banks in India prospectively up to March 1, 2022.

From RBI Governor’s Speech

Key decisions taken by RBI Governor and are mentioned in his speech as follows:

• In view of the success of Variable Rate Reverse Repo (VRRR) and given the rising level of surplus liquidity, it has now been decided to conduct VRRR auctions of longer maturity. This is a part of RBI’s liquidity management operations and should not be read as liquidity tightening. And Also mentioned the fact that, by paying a higher rate of interest on liquidity absorptions through the VRRR auctions, the RBI is indirectly expanding liquidity.
• Given the strong inter-connectedness of financial markets across borders and progressive integration into the global financial cycle, G sec Yields gone up where 10 Year Benchmark spiked from 5.93% level (during April’20-January’ 21) to 6.25% (10^th March 2021) resulted in increase in Corporate Bond Yields which ultimately impacted the Corporate Bond Issuances by moderating Supply of the same to Rs 45,685 Cr in Feb’21 from Rs 88,130 Cr in Dec’20.
• It has been Decided to conduct a secondary market G-sec acquisition programme (G-SAP 1.0) through which RBI Purchases Govt Securities as an Open Market Operation. It is decided to conduct for Rs 1 Lac Cr for Q1 of FY 2021-22. First GSAP will be conducted on 15^th April 2021 for Rs 25,000 Cr.