The newly appointed Monetary Policy Committee (MPC) of Reserve Bank of India with Dr. Ashima Goyal, Professor Jayanth R. Varma, and Dr. Shashanka Bhide, as external members met on 7th, 8th, and 9th October 2020 in its first meeting and the 25th under the monetary policy framework that was instituted in June 2016.

“The MPC evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4 percent. It also decided to continue with the accommodative stance of monetary policy as long as necessary – at least during the current financial year and into the next year – to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward. The Marginal Standing Facility (MSF) rate and the Bank rate remain unchanged at 4.25 percent. The reverse repo rate stands unchanged at 3.35 percent.”

Great news welcomed by all fully endorsing the deep understanding of the sudden green shoots first from the rural areas of stubborn upholding of economic growth, followed by the buoyance in a sharp increase in demand in the auto sector accompanied by an unbelievable increase for tractors to revive agriculture throwing cold water on negative writing economists whose projections went awry.

RBI governor gave a report dated 9th October 2020 which deserves the highest accolades and I intend covering his views in my own way of thinking. Now, over to his report from the RBI website.

https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3912

Exhibiting his optimism, a signature style of this RBI governor, to dream of a brighter tomorrow even in the bleakest of times, he quoted Dr. A.P.J Abdul Kalam, our visionary former President who said: “You have to dream before your dreams can come true…A dream is not that which you see while sleeping, it is something that does not let you sleep.”

Let us see why did he show extraordinary optimism in our economy?

The following economic indicators under various heads speak by themselves with their performance:

Keeping February 2020 as 100, the following heads with actual performance:

  • Electricity demand – 108
  • Two-wheelers production – 105
  • Automobiles Sales – 98
  • Steel consumption – 101
  • Freight traffic net ton-km – 102
  • Port cargo – 94
  • Production of tractors – 98
  • Domestic cargo – 63 (Please do read the whole annex to appreciate real growth)

Like myself, you are yet to recover from the shock given by actual performance of our economy due to timely action taken by RBI/Central government and state governments.

In his view, by all indications, the deep contractions of Q1:2020-21 had been behind us and that silver linings have started showing their visibility in the flattening of the active caseload curve across the country. Barring the incidence of a second wave, India will stand poised to shrug off the deathly grip of the virus and renew its tryst with its pre-COVID growth trajectory. Not a tall claim in view of the results shown by the economy in spite of gloom spread everywhere in the world.

Now, let me narrate the current scene in words:

1. Undeterred by the pandemic, the rural economy looks resilient. Kharif sowing has already surpassed last year’s acreage as well as the normal sown area. Improved soil moisture conditions, along with healthy reservoir levels, have brightened the outlook for the rabi season.

2. Early estimates suggest that foodgrains production is set to cross another record in 2020-21. Job creation under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) has provided incomes and employment in rural areas.

3. Meanwhile, migrant labor has been returning to work in urban areas, and factories and construction activity have come back to life reflected by rising levels of energy consumption and population mobility.

4. “In cities, traffic intensity is rising rapidly; online commerce is booming; and people are getting back to offices. The mood of the nation has shifted from fear and despair to confidence and hope.” Not an expression of emotion but a reflection of reality visible everywhere.

5. The manufacturing purchasing managers’ index (PMI) for September 2020 rose to 56.8, its highest mark since January 2012.

6. RBI Governor felt strongly in his report that the modest recovery in various high-frequency indicators in September 2020 could strengthen further in the second half of 2020-21 with progressive unlocking of economic activity.

Now is the time to know what he felt about financial market guidance.

Is it true that as the monetary policy authority with the responsibilities for development and regulation of financial markets and the management of public debt, the RBI had prioritized the orderly functioning of markets and financial institutions, easing of financing conditions, and the provision of adequate system-level as well as targeted liquidity?

Let me drag you to para 14 of page 6 of his speech.

Facts narrated by him may guide us.

Both the central government and states managed seamlessly with an augmented borrowing program for 2020-21.

From his report, I could gauge that the weighted average cost of borrowings by the central government during the first half of 2020-21 at 5.82 percent was the lowest in the last 16 years and that the weighted average maturity of the outstanding stock of the Centre had also been the highest so far.

With the assurance of RBI that the borrowing program of the Centre and states for the rest of 2020-21 would be completed in a non-disruptive manner without compromising on price and financial stability, and that In pursuit of that objective, the limit for Ways and Means Advances (WMA) for the Centre had been kept higher at ₹1.25 lakh crore as compared to ₹35,000 crores in H2 of the previous year. Similarly, the 60 percent increase in the WMA limit for states in the first half of 2020-21 had been extended for a further period of 6 months till March 31, 2021.

It is highly satisfying to know that the RBI would maintain comfortable liquidity conditions and conduct market operations in the form of outright and special open market operations and that the size of these auctions would be increased to ₹20,000 crores.

I am delighted to know that the MPC had decided to look through the current inflation hump as transient and address the more urgent need to revive growth and mitigate the impact of COVID-19.

Additional Measures

To provide impetus towards reviving the economy, certain additional measures were also announced in his report which is covered below:

 These measures have been intended to

(i) enhance liquidity support for financial markets;

(ii) regulatory support to improve the flow of credit to specific sectors within the ambit of the norms for credit discipline;

(iii) provide a boost to exports; and

(iv) deepen financial inclusion and facilitate ease of doing business by upgrading payment system services.

His narration of new liquidity measures merits special attention.

(a) “On Tap TLTRO: it has been decided to conduct on tap TLTRO with tenors of up to three years for a total amount of up to ₹1,00,000 crore at a floating rate linked to the policy repo rate. The scheme will be available up to March 31, 2021, with flexibility with regard to enhancement of the amount and period after a review of the response to the scheme.

(b) SLR Holdings in Held to Maturity Category: In order to provide certainty to banks as regards their investments and to foster orderly market conditions while ensuring congenial financing costs, it has been decided to extend the dispensation of the enhanced HTM limit of 22 percent up to March 31, 2022, for securities acquired between September 1, 2020, and March 31, 2021. It is expected that banks will be able to plan their investments in SLR securities in an optimal manner.

(c) Open Market Operations (OMOs) in State Development Loans (SDLs): In order to impart liquidity to SDLs and thereby facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year. This would improve secondary market activity and rationalize spreads of SDLs over central government securities of comparable maturities.”

(d) Many earlier articles of mine have covered the meaning of the Held to Maturity category, open market operations, etc.

Regulatory Measures

 RBI announced certain measures aimed at catalyzing augmented credit flows to the productive sectors of the economy. These were given in the report as under:

  • Revised Regulatory Limits for Retail Portfolio of Banks: In order to facilitate higher credit flow to this segment, which mainly involve of individuals and small businesses (i.e. with a turnover of up to ₹50 crores), and in harmonization with the Basel guidelines, we were informed that it was decided to increase this threshold to ₹7.5 crores in respect of all fresh as well as incremental qualifying exposures. This measure would definitely expand credit flow to small businesses. Basel guidelines are to be followed by all banks/central banks in the world.
  • Rationalization of Risk Weights on Individual Housing Loans: We were given the good news that it had been decided to rationalize the risk weights and link them to the loan-to-value ratio (LTV). LTV ratios would be intended only for all new housing loans sanctioned up to March 31, 2022. This measure was expected to give a fillip to the real estate sector.
  • Review of the Co-origination Model: It had been decided to extend the scheme to all NBFCs, including HFCs, in respect of all eligible priority sector loans, and allow greater operational flexibility to the lending institutions to leverage the comparative advantages of banks and NBFCs in a collaborative effort.
  • Round-the-Clock Availability of Real-Time Gross Settlement (RTGS) System: In December 2019, the RBI made available the National Electronic Funds Transfer (NEFT) system on a 24x7x365 basis, and the system had been operating smoothly since then. In order to facilitate swift and seamless payments in real-time for domestic businesses and institutions, it had been decided to make available the RTGS system round the clock. on all days from December 2020. India will be among very few countries globally with a 24x7x365 large value real-time payment system. This will facilitate innovations in the large value payments ecosystem and promote ease of doing business. Many of the earlier articles have extensively dealt with real-time gross settlement systems prevailing in the USA/UK etc.

Conclusion

In the midst of depression and total pessimism expressed by almost all central banks about the world economy in spite of extraordinary and unheard-of steps initiated by them, let me complete my article on a sublime note from the speech of our outstanding RBI Governor who has steadfastly led us so far with utmost confidence and actual performance. I just reproduce it for you to read many times to encourage your spirits. India will utilize this golden opportunity to become the best nation to emerge as the strongest economic power. Together, we grow. For a good entrepreneur, adversities are the best friends to help grow multifold.

“COVID-19 has tested and severely stretched our resources and our endurance. Our travails are not over yet and a renewed rise in infections remains a serious risk. We have, however, come far on an un-traveled road, with self-belief and the courage of hope. We will reach deep into our fortitude and inner strength to overcome whatever formidable challenges COVID-19 may unleash going forward.

 If we have the resolve to be steadfast until we emerge victoriously, I am confident we will muster the forces needed to subdue the pandemic. In the words of Mahatma Gandhi, and I quote”…if I have the belief that I can do it, I shall surely acquire the capacity to do it…” “Against all odds, we shall strive and revive.”

Many quotes from the speech of one of the greatest central bank governors was intentional, widening our minds and see the whole picture. Please let us dedicate to do better tomorrow in our tasks than yesterday, with due precautions for health, of course.

Disclaimer: As a student of monetary theory since 1973, I have the intention to express my views from the speech of our RBI governor which is mine only. None is responsible for this, either taxguru.in or RBI. One should refer to RBI for complete guidance.

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