Reserve Bank of India
Press Release No. 2020-2021/148
Date : Aug 06, 2020
The Monetary Policy Committee met on 4th, 5th and 6th August for its second meeting of 2020-21, the 24th under its aegis, completing four years of its operation under the new monetary policy framework. The MPC sifted through domestic and global conditions and evaluated their unfolding impact on overall outlook for India and the world. At the end of its deliberations, 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. 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. I thank the MPC members for their valuable contributions to the policy decision taken today.
2. The Reserve Bank of India (RBI) is perhaps the only central bank in the world to have set up a special quarantine facility with its officers, staff and service providers, numbering about 200, for critical operations to ensure business continuity in banking and financial market operations and payment systems. Other teams in the RBI have ensured availability of digital banking channels, ATMs, internet/ mobile banking, cyber security, redress of customer grievances, and carried out sustained campaigns about safe use of digital transactions through RBI Kehta Hai. Our teams have also provided logistical support, and engaged in analysis and research to back the conduct of financial and monetary policies. I am proud of all of them for their tireless commitment to public service. I would also like to applaud all employees of banks and other financial entities for ensuring uninterrupted operations in these trying times. Our gratitude also goes out to all COVID warriors – medical and health personnel, police and other law enforcement agencies, authorities at various levels and others.
Assessment
3. In the MPC’s assessment, 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. Global financial markets, however, have been buoyant, with the return of risk-off sentiment inserting a disconnect from the underlying state of the real economy. Portfolio flows to emerging markets have resumed and their currencies have appreciated.
4. The global manufacturing purchasing managers’ index (PMI) and the global services PMI rose to 50.3 and 50.5, respectively in July, moving back to the expansion zone. 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. CPI inflation remains largely subdued across major AEs, primarily due to benign fuel prices and soft aggregate demand since March. In most EMEs, however, CPI inflation, after easing in April-May, rose in June amidst cost-push pressures. Domestic food inflation remains elevated across most economies since the onset of the pandemic.
5. The MPC noted that 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. The PMI services remained in contractionary zone in July, although the downturn eased, relative to the June reading.
6. Headline CPI inflation, which was at 5.8 per cent in March 2020, was placed at 6.1 per cent in the provisional estimates for June 2020. Inflation pressures were evident across all sub-groups. Households’ one year ahead inflation expectations were lower than their three months ahead expectations in the July 2020 round of the Reserve Bank’s survey, indicating their anticipation of lower inflation over the longer horizon. Producers’ sentiments on input prices remained muted as their salary outgoes fell. Their selling prices contracted in Q1 in the April-June round of the Reserve Bank’s industrial outlook survey.
7. 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.
8. On the financing side, 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, however, 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
9. Against this backdrop, the MPC was of the view that 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. Nonetheless, upside risks to food prices remain. The abatement of price pressure in key vegetables is delayed and remains contingent upon normalisation of supplies. Protein-based food items could also emerge as a pressure point. Higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost push pressures going forward. Taking into consideration all these factors, the MPC expects headline inflation to remain elevated in Q2:2020-21, but likely to ease in H2:2020-21, aided by favourable base effects.
10. As regards the outlook for growth, the MPC noted that 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. An early containment of the COVID-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks.
11. The MPC noted that in an environment of unprecedented stress, supporting recovery of the economy assumes primacy in the conduct of monetary policy. While space for further monetary policy action is available, it is important to use it judiciously to maximise the beneficial effects for underlying economic activity. At the same time, the MPC is conscious of its medium term inflation target. The headline inflation prints of April-May 2020 are obscured by (a) the spike in food prices and (b) cost-push pressures. Meanwhile, the cumulative reduction of 250 basis points is working its way through the economy, lowering interest rates in money, bond and credit markets, and narrowing down spreads. Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold, while remaining watchful for a durable reduction in inflation to use available space to support the revival of the economy.
12. Living with the pandemic has improved the way we manage it – working from home; virtual meetings; and “contactless” transactions. Throughout this traumatic period, one thing has stood out – the indomitable spirit of humanity, the inner conviction that whatever be the challenge, we have the innate resilience to combat them, overcome them and emerge victorious. I continue to be an eternal optimist; Mahatma Gandhi should inspire us: “If our resolve is firm and our conviction clear, it would mean half the battle won….”1
Impact of the Monetary and Liquidity Measures taken by the RBI
13. Against this backdrop, let me turn to the impact of the monetary and liquidity measures so far taken by the RBI to mitigate the negative fallout of COVID-19.
14. It may be noted that transmission of the rate cuts by the MPC would not have been possible to the extent achieved so far without creating comfortable liquidity conditions. The overriding objective was to prevent financial markets from freezing up; ensure normal functioning of financial intermediaries; ease the stress faced by households and businesses; and keep the life blood of finance flowing. This is achieved by infusing large amounts of liquidity in and out of the system through injections and absorptions through the LAF. In the process, the easing of financial conditions has actually enhanced monetary transmission and, thereby, the effectiveness of the MPC’s accommodative stance and actions. What is more, the injections of liquidity, including through open market operations, special operations and forex interventions, are being fully sterilised by absorptions through the reverse repo, while preventing a seizure of money markets under extreme risk aversion and uncertainty.
15. Another aspect that needs to be recognised is that RBI’s open market purchases are aimed at reducing funding costs for private sector entities that issue instruments in the market which are usually priced off the G-sec yield as the benchmark. In fact, it is worthwhile to see who is benefiting from RBI’s actions. Borrowing costs in financial markets have dropped to their lowest in a decade on the back of abundant liquidity. Interest rates on instruments like the 3-month Treasury bill, commercial paper (CP) and certificates of deposit have fully priced in the reduction in the policy rate and are, in fact, trading below it in the secondary market. CPs of NBFCs have softened to 3.80 per cent on July 31, 2020. Rates have fallen to 3.40 per cent on July 31, 2020 for non-NBFC borrowers.
16. With illiquidity premia dissipating under the impact of Operation Twist and TLTRO 1.0, spreads of 3-year AAA-rated corporate bonds over similar tenor government securities have also declined from 276 basis points on March 26, 2020 to 50 basis points on July 31, 2020. Spreads on AA+ rated bonds softened from 307 basis points to 104 basis points; spreads on AA bonds narrowed from 344 basis points to 142 basis points over the same period. Even for the lowest investment grade bonds (BBB-), spreads have come down by 125 basis points as on July 31, 2020.
17. 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. For AA+ rated 3-year NBFC bonds, spreads over similar tenor G-secs have narrowed from 360 basis points on March 26 to 139 basis points on July 31, 2020.
18. 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.
19. At the same time, financial conditions have improved in specific sectors. Although non-food bank credit has slowed to 5.6 per cent (As on 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. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 162 basis points during February 2019-June 2020, of which 91 basis points transmission was witnessed during March-June 2020.
Additional Measures
20. With COVID-19 infections rising unabated under fragile macroeconomic and financial conditions, we propose to undertake additional developmental and regulatory policy measures to (i) enhance liquidity support for financial markets and other stakeholders; (ii) further ease financial stress caused by COVID-19 disruptions while strengthening credit discipline; (iii) improve the flow of credit; (iv) deepen digital payment systems; (v) augment customer safety in cheque payments; and (vi) facilitate innovations across the financial sector by leveraging on technology.
21. In the worst peacetime health and economic crisis of the last 100 years that we face today, the regulatory response has to be dynamic, proactive and balanced. While designing the major announcements that I am making today, we have ensured that necessary safeguards are in place for preserving financial stability. We are fully mindful of RBI’s responsibility to maintain stability of the financial sector. While I am outlining the main measures, the Statement on Developmental and Regulatory Measures addresses them in greater detail.
(i) Additional Special Liquidity Facility (ASLF)
22. 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.
(ii) Resolution Framework for COVID-19-related Stress
23. The “Prudential Framework on Resolution of Stressed Assets” dated June 7, 2019 provides a principle-based resolution framework for addressing borrower defaults. Any resolution plan implemented under the Prudential Framework, which involves granting of any concessions on account of financial difficulty of the borrower, entails an asset classification downgrade except when accompanied by a change in ownership, subject to prescribed conditions.
24. The disruptions caused by COVID-19 have led to heightened financial stress for borrowers across the board. A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities. This can potentially impact their long-term viability and pose significant financial stability risks if it becomes wide-spread. Accordingly, 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.
25. In the light of past experience with regard to use of regulatory forbearance, necessary safeguards have been incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring. The underlying theme of this resolution window is preservation of the soundness of the Indian banking sector.
26. The Reserve Bank is constituting an Expert Committee (Chairman: Shri K.V. Kamath) which shall make recommendations to the RBI on the required financial parameters, along with the sector specific benchmark ranges for such parameters, to be factored into resolution plans. The Expert Committee shall also undertake a process validation of resolution plans for borrowal accounts above a specified threshold. The details of the resolution framework are spelt out in Part ‘B’ of the MPC resolution and the circular, both of which will be issued immediately after this press statement.
(iii) Restructuring of MSME debt
27. 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.
(iv) Advances against Gold Ornaments and Jewellery
28. 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.
(v) Banks’ Investment in Debt Mutual Funds and Debt Exchange Traded funds – Capital Charge for Market risk
29. As per RBI’s extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital, as compared to holding the same debt instrument through a Mutual Fund (MF)/Exchange Traded Fund (ETF). It has been decided to harmonise the differential treatment existing currently. This will result in substantial capital savings for banks and is expected to give a boost to the corporate bond market.
(vi) Review of Priority Sector Lending Guidelines
30. With a view to aligning the guidelines with emerging national priorities and bring sharper focus on inclusive development, the Priority Sector Lending (PSL) guidelines have been reviewed. An incentive framework is now being put in place for banks to address the regional disparities in the flow of priority sector credit. While higher weightage will be assigned for incremental priority sector credit in the identified districts having lower credit flow, a lower weightage would be assigned in identified districts where the credit flow is comparatively higher. PSL status is also being given to start-ups; and the limits for renewable energy, including solar power and compressed bio-gas plants, are being increased.
(vii) Other measures that are being announced today include:
31. (a) 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.
(b) While permitting lenders to provide relief to the borrowers through various measures, it is also considered necessary to take appropriate measures for strengthening credit discipline. In view of the concerns emanating from use of multiple operating accounts by borrowers, both current accounts as well as cash credit (CC)/overdraft (OD) accounts, it has been decided to put in place certain safeguards for opening of such accounts for borrowers availing credit facilities from multiple banks.
(c) The Reserve Bank has constantly endeavoured to encourage responsible innovation by entities in the financial services sector. In order to further promote and facilitate an environment that can accelerate innovation across the financial sector, Reserve Bank will set up an Innovation Hub in India. Further details about the Innovation Hub would be announced in due course.
(d) 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. Operational guidelines in this regard will be issued separately.
(e) 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 will also be introduced.
Concluding Remarks
32. At this juncture, the war against COVID-19 is most intense, and the world is bracing up for a second wave as it cautiously opens up. The pandemic poses a challenge of epic proportions, but our collective efforts, intrepid choices, innovations and true grit will eventually take us to victory. As Mahatma Gandhi had said, “Patience and perseverance, if we have them, overcome mountains of difficulties”2. The challenges of today will only strengthen our resilience and self-belief. We shall remain alert and watchful and collectively do whatever is necessary to revive the economy and preserve financial stability. Courage and conviction will conquer Covid-19.
Thank you.
Press Release: 2020-2021/148
1 Mahatma Gandhi, Harijan, July 21, 1940.
2 Mind of Mahatma Gandhi (Eds: Prabhu and Rao), 3rd Edition, 1968 pp. 365
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Reserve Bank of India
Date : Aug 06, 2020
Press Release No. 2020-2021/149
Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee (MPC) August 4 to 6, 2020 On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (August 6, 2020) decided to:
- keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent.
Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.
- The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
The main considerations underlying the decision are set out in the statement below.
Assessment
Global Economy
2. Since the MPC met in May 2020, global economic activity has remained fragile and in retrenchment in several geographies. While the uneasy and differently-paced withdrawal of COVID-19 lockdown restrictions in some countries enabled a sequential improvement in high frequency indicators during May-July, a renewed surge in COVID-19 infections in major economies and threats of a second wave of infections appear to have weakened these early signs of revival. Contractions in economic activity have been more severe in Q2:2020 than in Q1, and the near-term outlook points to a slow, uneven and hesitant recovery pushed into the second half of the year, with risks steeply slanted to the downside. Among advanced economies (AEs), output in the US and the Euro area underwent a deeper contraction in Q2:2020 than in the preceding quarter. Emerging market economies (EMEs) are expected to shrink in Q2 as reflected in high frequency indicators.
3. Global financial markets have rebounded since end-March 2020 with intermittent pauses, shrugging off the volatility and sharp correction recorded in Q1:2020. Portfolio flows returned to EMEs in Q2 after a massive reversal, though there was moderation in July from the previous month’s level. EME currencies have also appreciated in close co-movement, tracking weakening of the US dollar. Crude oil prices have remained supported on supply cuts by oil producing countries (OPEC plus) and improved demand prospects on the gradual easing of lockdown restrictions since May. Gold prices have rallied to an all-time high on August 5 on the back of safe haven demand. In AEs, benign fuel prices and soft aggregate demand have kept inflation subdued. In many EMEs, however, cost-push pressures arising from supply disruptions and demand revival have shown up in consumer prices in June 2020. Global food prices are elevated across the board.
Domestic Economy
4. On the domestic front, economic activity had started to recover from the lows of April-May following the uneven re-opening of some parts of the country in June; however, surges of fresh infections have forced re-clamping of lockdowns in several cities and states. Consequently, several high frequency indicators have levelled off.
5. The agricultural sector has emerged as a bright spot. Its prospects have strengthened on the back of good spatial and temporal progress of the south-west monsoon. The cumulative monsoon rainfall was 1 per cent below the long-period average (LPA) up to August 5, 2020. Spurred by the expanding precipitation, the total area sown under kharif crops on July 31 was 5.9 per cent higher than the normal area measured by the average over the period 2014-15 to 2018-19. As on July 30, 2020, the live storage in major reservoirs was 41 per cent of the full reservoir level (FRL), which bodes well for the rabi season. These developments have had a salutary effect on rural demand as reflected in fertiliser production and sales of tractors, motorcycles and fast-moving consumer goods.
6. The pace of contraction of industrial production, measured by the index of industrial production (IIP), moderated to (-) 34.7 per cent in May from (-) 57.6 per cent a month ago, with the easing of lockdowns in different parts of the country. All manufacturing sub-sectors, except pharmaceuticals, remained in negative territory. The output of core industries in June contracted for the fourth successive month though with a considerable moderation. The Reserve Bank’s business assessment index (BAI) for Q1:2020-21 hit its lowest mark in the survey’s history. The manufacturing PMI remained in contraction, shrinking further to 46.0 in July from 47.2 in the preceding month.
7. High frequency indicators of services sector activity for May-June indicate signs of a modest resumption of economic activity, especially in rural areas, although at levels lower than a year ago. Notably, the decline in passenger vehicle sales moderated to (-) 49.6 per cent in June from (-) 85.3 per cent in May, indicative of tentative urban demand, and faster recovery of sales in rural areas. On the other hand, domestic air passenger traffic and cargo traffic continued to post sharp contraction. Construction activity remained tepid – cement production fell and finished steel consumption moderated sharply in June. Imports of capital goods – a key indicator of investment activity – declined further in June. The services PMI continued in contractionary zone in July to 34.2, although the downturn eased relative to the May and June readings.
8. The National Statistical Office (NSO) released data on headline CPI for the month of June 2020 on July 13, 2020, along with imputed back prints of the index for April and May 2020. This resulted in a sharp upward revision of food inflation for the month of April and May. During Q1:2020-21 food inflation moderated from 10.5 per cent in April to 7.3 per cent in June 2020. Meanwhile, fuel inflation edged up as international kerosene and LPG prices firmed up. Inflation excluding food and fuel was at 5.4 per cent in June, reflecting a spike in prices across most sub-groups. Inflation in transport and communication, personal care and effects, pan-tobacco and education registered significant increases in June. Headline CPI inflation, which was at 5.8 per cent in March 2020 was placed at 6.1 per cent in the provisional estimates for June 2020.
9. For the second successive round, households’ three months ahead expectations remained above their one year ahead expectations, indicating their anticipation of lower inflation over the longer horizon. Producers’ sentiments on input prices remained muted as their salary outgoes fell. Their selling prices contracted in Q1 in the April-June round of the Reserve Bank’s industrial outlook survey. The contraction in output prices is also corroborated by firms participating in the manufacturing PMI survey.
10. Domestic financial conditions have eased substantially and systemic liquidity remains in large surplus, due to the conventional and unconventional measures by the Reserve Bank since February 2020. Cumulatively, these measures assured liquidity of the order of ₹9.57 lakh crore or 4.7 per cent of GDP. Reflecting these developments, reserve money (RM) increased by 15.4 per cent on a year-on-year basis (as on July 31, 2020), driven by a surge in currency demand (23.1 per cent). Growth in money supply (M3), however, was contained at 12.4 per cent as on July 17, 2020. Average daily net absorptions under the liquidity adjustment facility (LAF) moderated from ₹5.3 lakh crore in May 2020 to ₹4.1 lakh crore in June as government spending slowed. In July, average daily net absorptions under the LAF moderated further to ₹4.0 lakh crore, as government spending remained subdued. During 2020-21 (up to July 31), ₹1,24,154 crore was injected through open market operation (OMO) purchases. In order to distribute liquidity more evenly across the term structure and improve transmission, the Reserve Bank conducted ‘operation twist’ auctions involving the simultaneous sale and purchase of government securities for ₹10,000 crore on July 2, 2020. Furthermore, the utilisation of refinance provided by the Reserve Bank to the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB) increased to ₹34,566 crore on July 31, 2020 from ₹22,334 crore during the May policy.
11. The transmission to bank lending rates has improved further, with the weighted average lending rate (WALR) on fresh rupee loans declining by 91 bps during March-June 2020. The spreads of 3-year AAA rated corporate bonds over G-Secs of similar maturity declined from 276 bps on March 26, 2020 to 50 bps by end-July 2020. Even for the lowest investment grade bonds (BBB-), spreads have come down by 125 bps by end-July 2020. Lower borrowing costs have led to record primary issuance of corporate bonds of ₹2.1 lakh crore in the first quarter of 2020-21.
12. India’s merchandise exports contracted for the fourth successive month in June 2020, although the pace of fall moderated on improving shipments of agriculture and pharmaceutical products. 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. The current account balance turned into a marginal surplus of 0.1 per cent of GDP in Q4 of 2019-20 as against a deficit of 0.7 per cent a year ago. On the financing side, 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 (till July 31), 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, however, 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 (up to July 31) to US$ 534.6 billion – equivalent to 13.4 months of imports.
Outlook
13. 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. The relatively moderate increases in minimum support prices (MSP) for the kharif crops and monsoon are also supportive of benign inflation prospects. Nonetheless, upside risks to food prices remain. The abatement of price pressure in key vegetables is delayed and remains contingent upon normalisation of supplies. Protein based food items could also emerge as a pressure point, given the tight demand-supply balance in the case of pulses. The inflation outlook of non-food categories is, however, fraught with uncertainty. Higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost-push pressures going forward. Volatility in financial markets and rising asset prices also pose upside risks to the outlook. Taking into consideration all these factors, headline inflation may remain elevated in Q2:2020-21, but may moderate in H2:2020-21 aided by large favourable base effects.
14. Turning to the growth outlook, the recovery in the rural economy is expected to be robust, buoyed by the progress in kharif sowing. Manufacturing firms responding to the Reserve Bank’s industrial outlook survey 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 Q2-Q4 is expected to evolve along the lines noted in the May resolution. For the year 2020-21, as a whole, real GDP growth is expected to be negative. An early containment of the COVID-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks.
15. The June release of headline inflation after a gap of two months and imputed prints of the CPI for April-May have added uncertainty to the inflation outlook. The NSO has adopted best practices in producing these imputations for the purpose of business continuity in the face of challenges to data collection due to the nation-wide lockdown. The NSO has, however, not provided inflation rates for April and May. For the purpose of monetary formulation and conduct, therefore, the MPC is of the view that CPI prints for April and May can be regarded as a break in the CPI series.
16. The MPC noted that the economy is experiencing unprecedented stress in an austere global environment. Extreme uncertainty characterises the outlook, which is heavily contingent upon the intensity, spread and duration of the pandemic – particularly the heightened risks associated with a second wave of infections – and the discovery of the vaccine. In these conditions, supporting the recovery of the economy assumes primacy in the conduct of monetary policy. In pursuit of this objective, the stance of monetary policy remains accommodative as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy. While space for further monetary policy action in support of this stance is available, it is important to use it judiciously and opportunistically to maximise the beneficial effects for underlying economic activity.
17. At the same time, the MPC is conscious that its primary mandate is to achieve the medium-term target for CPI inflation of 4 per cent within a band of +/- 2 per cent. It also recognises that the headline CPI prints of April-May, 2020 require more clarity. At the current juncture, the inflation objective itself is further obscured by (a) the spike in food prices because of floods in eastern India and ongoing lockdown related disruptions; and (b) cost-push pressures in the form of high taxes on petroleum products, hikes in telecom charges, rising raw material costs reflected in upward revisions in steel prices and rise in gold prices on safe haven demand. Given the uncertainty surrounding the inflation outlook and taking into consideration the extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, it is prudent to pause and remain watchful of incoming data as to how the outlook unravels.
18. Meanwhile, the cumulative reduction of 250 basis points since February 2019 is working its way through the economy, lowering interest rates in money, bond and credit markets, and narrowing down spreads. Financing conditions have eased considerably, enabling financial flows via financial markets, especially at a time when banks remain highly risk averse. Accordingly, the MPC decides to stay on hold with regard to the policy rate and remain watchful for a durable reduction in inflation to use the available space to support the revival of the economy.
19. All members of the MPC – Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Mridul K. Saggar, Dr. Michael Debabrata Patra and Shri Shaktikanta Das – unanimously voted for keeping the policy repo rate unchanged and continue with the accommodative stance as long as necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
20. The minutes of the MPC’s meeting will be published by August 20, 2020.
Press Release: 2020-2021/149
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Reserve Bank of India
Press Release No. 2020-2021/150
Date : Aug 06, 2020
Statement on Developmental and Regulatory Policies
This Statement sets out various developmental and regulatory policy measures to enhance liquidity support for financial markets and other stakeholders; further easing of financial stress caused by COVID-19 disruptions while strengthening credit discipline; improve the flow of credit; deepen digital payments; augment customer safety in cheque payments; and facilitate innovation across the financial sector by leveraging on technology through an Innovation Hub.
I. Liquidity Management and Financial Markets
1. Additional Liquidity Facility for National Housing Bank
Special refinance facilities for a total amount of ₹65,000 crore were provided to all India financial institutions (AIFIs) – the National Bank for Agriculture and Rural Development (NABARD); the Small Industries Development Bank of India (SIDBI); the National Housing Bank (NHB); and EXIM Bank – in order to support their role in meeting funding requirements of various sectors. In order to shield the housing sector from liquidity disruptions under the prevailing conditions and augment the flow of finance to the sector, it has been decided to provide an additional standing liquidity facility (ASLF) of ₹5,000 crore to NHB – over and above ₹10,000 crore already provided – for supporting housing finance companies (HFCs). The facility will be for a period of one year and will be charged at the RBI’s repo rate.
2. Additional Liquidity Facility for NABARD
Liquidity support of ₹25,000 crore was extended to the National Bank for Agriculture and Rural Development (NABARD) in April 2020 to back agricultural operations in the wake of challenges posed by COVID-19 and in view of the brightening prospects of the farm sector, its capacity to provide employment in these trying times, and its backward and forward linkages. In order to ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity, it has now been decided to provide an additional special liquidity facility (ASLF) of ₹5,000 crore to NABARD for a period of one year at the RBI’s policy repo rate for refinancing NBFC-MFIs and other smaller NBFCs of asset size of ₹ 500 crore and less to support agriculture and allied activities and the rural non-farm sector.
3. Introduction of a Flexible Automated Option for Managing CRR Balances
The Reserve Bank will introduce an optional facility to provide banks more flexibility/discretion to manage their day end cash reserve ratio (CRR) balances. Using this facility in e-Kuber system, banks will be able to set the amount (specific or range) that they wish to keep as balance in their current account with RBI at the end of the day. Depending upon this pre-set amount, marginal standing facility (MSF) and reverse repo bids, as the case may be, will be auto-generated at the end of the day.
Detailed guidelines are being issued separately.
II. Regulation and Supervision
Measures Aimed at Mitigating the Economic Fallout of COVID-19
The regulatory focus over the past few months has been to frame appropriate policy responses to mitigate the immediate impact of COVID-19 on the financial institutions and their constituents. These measures were aimed at providing temporary reprieve to borrowers affected by the pandemic, as well as address the liquidity needs of various segments of the financial system, while maintaining its resilience. RBI remains committed to take any further measures felt necessary in this direction while at the same time remaining fully committed to maintaining financial stability. Going forward, as the process for normalisation of economic activity gathers pace, the need to address the deeper cash flow/balance sheet stress that many of the viable entities may have been exposed to on account of the pandemic and the consequent impact on the financial institutions is also recognised.
4. Resolution Framework for COVID-19-related Stress
The “Prudential Framework on Resolution of Stressed Assets” dated June 7, 2019 provides a principle-based resolution framework for addressing borrower defaults under a normal scenario. Any resolution plan implemented under the Prudential Framework which involves granting of any concessions on account of financial difficulty of the borrower entails an asset classification downgrade, except when it is accompanied by a change in ownership, which allows the asset classification to be retained or upgraded to Standard, subject to the prescribed conditions.
The economic fallout on account of the COVID-19 pandemic has led to significant financial stress for a number of borrowers across the board. The resultant stress can potentially impact the long-term viability of a large number of firms, otherwise having a good track record under the existing promoters, due to their debt burden becoming disproportionate, relative to their cash flow generation abilities. Such wide spread impact could impair the entire recovery process, posing significant financial stability risks.
Considering the above, with the intent to facilitate revival of real sector activities and mitigate the impact on the ultimate borrowers, it has been decided to provide a window under the Prudential Framework to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership, and personal loans, while classifying such exposures as Standard subject to specified conditions. Such conditions are considered necessary to ensure that the facility of this resolution window is available only to the COVID-19 related stressed assets. Besides, the crucial aspect of maintaining financial stability has also been suitably factored in.
In light of past experiences with regard to use of regulatory forbearances, necessary safeguards are being incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring. Given the intent to facilitate revival of real sector activities and mitigate the impact on the ultimate borrowers, the framework shall not be available for exposures to financial sector entities as well as Central and State Governments, Local Government bodies (e.g. Municipal Corporations) and any body corporate established by an Act of Parliament or State Legislature.
The key features of the resolution framework for exposures other than personal loans are as under:
i. Only those borrower accounts shall be eligible for resolution under this framework which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020. Further, the accounts should continue to remain standard till the date of invocation. All other accounts, as hitherto, may be considered for resolution under the June 7th Prudential Framework, or the relevant instructions as applicable to specific category of lending institutions where the Prudential Framework is not applicable.
ii. The resolution plan may be invoked anytime till December 31, 2020 and shall have to be implemented within 180 days from the date of invocation.
iii. Lenders shall have to keep additional provisions of 10 per cent on the post-resolution debt.
iv. In order to enforce collective action, specific voting thresholds are being prescribed even for invocation of the resolution plan; and those lending institutions not signing the inter-creditor agreement (ICA) within 30 days from the date of invocation shall attract higher provisions of 20.
v. Post-implementation, the asset classification of the account shall be retained as standard, or if the account had slipped into NPA after invocation but before implementation, the asset classification shall be restored upon implementation.
vi. The Reserve Bank is constituting an Expert Committee (Chairman: Shri K.V. Kamath) which shall make recommendations to the RBI on the required financial parameters, along with the sector specific benchmark ranges for such parameters, to be factored into each resolution plans. The final notification in this regard shall be issued by the Reserve Bank after considering the recommendations.
vii. The Expert Committee shall also undertake a process validation of resolution plans for accounts above a specified threshold.
viii. The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.
ix. Wherever the resolution plans involve conversion of a portion of debt into equity and other debt instruments, the debt instruments with terms similar to the loan shall be counted as part of the post-resolution debt, whereas the portion converted into other non-equity instruments shall be fully written down.
x. In respect of accounts involving consortium or multiple banking arrangements, all receipts by the borrower; all repayments by the borrower to the lending institutions; as well as all additional disbursements, if any, to the borrower by the lending institutions as part of the resolution plan, shall be routed through an escrow account maintained with one of the lending institutions.
With respect to personal loans, a separate framework is being prescribed. The resolution plan for personal loans under this framework may be invoked till December 31, 2020 and shall be implemented within 90 days thereafter. The lending institutions are, however, encouraged to strive for early invocation in eligible cases. The timelines for implementation of resolution plan in case of personal loans are assessed to be adequate since, unlike larger corporate exposures, there will not be any requirement for third party validation by the Expert Committee, or by credit rating agencies, or need for ICA. The contours of the plan may be decided based on the Board approved policies of the lenders subject to extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.
Guidelines in this regard are being issued today.
5. Restructuring of MSME debt
With regard to MSMEs, a restructuring framework is already in place for MSMEs that were in default but ‘standard’ as on January 1, 2020, subject to the restructuring being implemented upto December 31, 2020. The scheme has provided relief to a large number of MSMEs. However, the stress in the MSME sector has got accentuated on account of the fallout of COVID-19.
Recognising the need for continued support to MSMEs’ meaningful restructuring, it has been decided that, in respect of MSME borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may restructure the debt under the existing framework, provided the borrower’s account was classified as standard with the lender as on March 1, 2020. This restructuring shall be implemented by March 31, 2021.
Guidelines in this regard are being issued separately today.
6. Advances against Gold Ornaments and Jewellery
As per the 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 further mitigate the economic impact of the COVID-19 pandemic on households, entrepreneurs and small businesses, it has been decided to increase the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75 per cent to 90 per cent. This relaxation shall be available till March 31, 2021.
Guidelines in this regard are being issued today.
7. Streamlining the Use of Multiple Operating Accounts by Large Borrowers
While permitting the lending institutions to provide necessary relief to the borrowers through various measures, it is also considered necessary to take appropriate measures for strengthening credit discipline. Use of multiple operating accounts by borrowers, both current accounts as well as cash credit (CC)/overdraft (OD) accounts, has been observed to be prone to vitiating credit discipline. The checks and balances put in place in the extant framework, for opening of current accounts, are found to be inadequate.
As such, it has been decided to address the above concerns through appropriate safeguards for opening of current accounts and CC/OD accounts for customers availing credit facilities from multiple banks.
Detailed instructions are being issued in this regard.
The above measures are also expected to bring in the requisite discipline in collective actions by the creditors for speedier resolution of stress in the accounts of borrowers, which will be critical in implementation of the Resolution Framework for COVID-19- related Stress, as mentioned earlier.
8. Investment by Banks in Debt Mutual Funds and Debt Exchange Traded funds – Capital Charge for Market risk
As per RBI’s extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital as compared to holding the same debt instrument through a Mutual Fund (MF)/Exchange Traded Fund (ETF). This is because specific risk capital charge as applicable to equities is applied to investments in MFs/ETFs; whereas if the bank was to hold the debt instrument directly, specific risk capital charge is applied depending on the nature and rating of debt instrument. It has therefore been decided to harmonise the differential treatment existing currently. At the same time, it is observed that a debt MF/ETF also has features akin to equity, since in the event of default of even one of the debt securities in the MF/ETF basket, there is often severe redemption pressure on the fund notwithstanding the fact that the other debt securities in the basket are of high quality. Hence, it has been decided that the general market risk charge of 9 per cent will continue to be applied. Thus, computation of total capital charge for market risk shall incorporate elements of both debt and equity instruments. This will result in substantial capital savings for banks and is expected to give a boost to the bond market.
The circular in this regard is being issued separately.
III. Financial Inclusion
9. Review of Priority Sector Lending Guidelines
The Priority Sector Lending (PSL) guidelines issued by Reserve Bank of India were last reviewed in April 2015. With a view to align the guidelines with emerging national priorities and bring sharper focus on inclusive development, the guidelines have been reviewed after wide ranging consultations with all stakeholders. The revised guidelines also aim to encourage and support environment friendly lending policies to help achieve Sustainable Development Goals (SDGs).
With a view to address the regional disparities in the flow of priority sector credit, an incentive framework has been put in place for banks. While higher weight will be assigned for incremental priority sector credit in the identified districts where credit flow is comparatively lower, a lower weight would be assigned to incremental priority sector credit in identified districts where the credit flow is comparatively higher.
Other changes include broadening the scope of PSL to include start-ups; increasing the limits for renewable energy, including solar power and compressed bio gas plants; and, increasing the targets for lending to ‘Small and Marginal Farmers’ and ‘Weaker Sections’.
Detailed guidelines in this regard will be issued shortly.
IV. Payment and Settlement Systems
10. Scheme of Offline Retail Payments Using Cards and Mobile Devices
There has been considerable growth in digital payments using mobile phones, cards, wallets, etc. Lack of internet connectivity or low speed of internet, especially in remote areas, is a major impediment in adoption of digital payments. Against this backdrop, providing an option of off-line payments through cards, wallets and mobile devices is expected to further the adoption of digital payments. The Reserve Bank has been encouraging entities to develop offline payment solutions. It is, therefore, proposed to allow a pilot scheme for small value payments in off-line mode with built-in features for safeguarding interest of users, liability protection, etc.
The instructions in this regard will be issued shortly. Based on experience gained, detailed guidelines for roll-out of the scheme will be announced in due course.
11. Online Dispute Resolution (ODR) for Digital Payments
As the number of digital transactions rise significantly, there is a concomitant increase in the number of disputes and grievances. Recourse to technology-driven redressal mechanisms that are rule-based, transparent and involve minimum (or no) manual intervention is necessary to deal with them in a timely and effective manner. Accordingly, the Reserve Bank shall require Payment System Operators (PSOs) to introduce Online Dispute Resolution (ODR) Systems in a phased manner. To begin with, authorised PSOs shall be required to implement ODR systems for failed transactions in their respective Payment Systems. Based on the experience gained, ODR arrangements will be extended to other types of disputes and grievances.
Instructions in this regard will be issued today.
12. Positive Pay Mechanism for Cheques
The Cheque Truncation System (CTS) for clearing cheques is operational pan-India and presently covers 2 per cent and 15 per cent of total retail payments in terms of volume and value respectively; the average value of a cheque cleared in CTS presently is ₹82,000. The CTS-2010 standard specifying minimum-security features on cheque leaves acts as a deterrent against cheque frauds, while standardisation of field placements on cheque forms enables straight-through-processing by use of optical / image character recognition technology. To further augment customer safety in cheque payments and reduce instances of fraud occurring on account of tampering of cheque leaves, it has been decided to introduce a mechanism of Positive Pay for all cheques of value ₹50,000 and above. Under this mechanism, cheques will be processed for payment by the drawee bank based on information passed on by its customer at the time of issuance of cheque. This measure will cover approximately 20 per cent and 80 per cent of total cheques issued in the country by volume and value, respectively.
Operational guidelines for the purpose will be issued separately.
13. Creation of Reserve Bank Innovation Hub
The Reserve Bank has constantly endeavoured to encourage responsible innovation by entities in the financial services sector. The Regulatory Sandbox framework was one such recent initiative in which Digital Payments were the first cohort. Six proposals were accepted under the Sandbox, the pilot studies / trials of which have been delayed on account of the present COVID-19 situation. Areas such as cyber security, data analytics, delivery platforms, payments services, etc., remain in the forefront when we think of innovation in the financial sector. To promote innovation across the financial sector by leveraging on technology and create an environment which would facilitate and foster innovation, Reserve Bank will set up an Innovation Hub in India. The Innovation Hub will act as a centre for ideation and incubation of new capabilities which can be leveraged to create innovative and viable financial products and / or services to help achieve the wider objectives of deepening financial inclusion, efficient banking services, business continuity in times of emergency, strengthening consumer protection, etc. The Innovation Hub will support, promote and hand-hold cross-thinking spanning regulatory remits and national boundaries.
(Yogesh Dayal)
Chief General Manager
Press Release: 2020-2021/150
