Monetary Policy
Retail Investors Allowed Direct Access To G-Sec Market
Expert Committee to provide a road map for strengthening UCBs
The Monetary Policy Committee (MPC) of the Reserve Bank of India, which met on 3 – 5 February voted unanimously to leave the policy repo rate unchanged at 4% and decided to continue with the accommodative stance of monetary policy as long as necessary – at least through the current financial year and into the next year. The Committee felt this is necessary to revive growth on a durable basis and mitigate the impact of covid, 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%. The reverse repo rate too stands unchanged at 3.35%.
For the first time during the covid period, inflation has eased below the upper tolerance level of 6%. Going ahead, factors that could shape the food inflation trajectory in coming months – the likely bumper kharif harvest arrivals in markets, rising prospects of a good rabi crop, larger winter supplies of key vegetables and softer poultry demand on fears of avian flu – are all indicative of a stable near-term outlook, the RBI said.
Assessment of Growth, Inflation
The RBI’s survey points towards improvement in capacity utilization in the manufacturing sector to 63.3% in Q2:2020-21 from 47.3% in the preceding quarter. Consumer confidence is reviving, and business expectations of manufacturing, services and infrastructure remain upbeat. Furthermore, the vaccination drive is expected to provide an impetus for the restoration of contact intensive sectors and a leading edge to the Indian pharma industry in the global market.
What is more, the flow of financial resources to the commercial sector has been improving, particularly in respect of non-food bank credit and via commercial paper (CPs), credit by housing finance companies, private placement of corporate bonds and foreign direct investment. The total flow of these resources is ₹8.85 lakh crore this year so far (up to 15 January 2021), compared with ₹7.97 lakh crore during the corresponding period of last year. The latest bank lending survey of RBI suggests further sequential improvement in sentiment on loan demand across all sectors right up to Q2:2021-22. Taking these factors into consideration, real GDP growth is projected at 10.5% in 2021-22 – in the range of 26.2 to 8.3% in H1 and 6.0 per cent in Q3, said RBI Governor Shaktikanta Das, after the meeting of the Committee.
The projection for CPI inflation has been revised to 5.2% for Q4:2020-21, 5.2% to 5% in H1:2021-22 and 4.3% for Q3:2021-22, with risks broadly balanced. 9. By March 2021, the Government would be reviewing the inflation target for the next 5 years.
Liquidity Guidance
The RBI and the markets evolved a shared understanding towards cooperative solutions during the pandemic period. The issuance of corporate bonds reached a record level (₹5.8 lakh crore during April-December 2020 as compared with ₹4.6 lakh crore during April-December 2019).
The measures taken by the RBI through a combination of policy rate cuts, proactive liquidity management and regulatory forbearance against the backdrop of global spill overs and the nation-wide lockdown ensured smooth transmission of policy rate cuts across the market spectrum, narrowing of risk spreads and a rekindling of the corporate bond market. In the G-sec market in which risk-free benchmarks evolve, a record low weighted average cost of 5.78% and an elongated weighted average maturity of 14.9 years testify to the credibility of monetary and liquidity management operations of RBI.
The stance of liquidity management continues to be accommodative and completely in consonance with the stance of monetary policy. The RBI stands committed to ensure the availability of ample liquidity in the system and thereby foster congenial financial conditions for the recovery to gain traction. Notably, reserve money rose by 14.5% yoy (on 29 January 2021), led by currency demand. Money supply (M3), on the other hand, grew by only 12.5%t as on 15 January 2021.
The RBI has proactively taken steps to insulate domestic financial markets from global spill overs and consequent volatility while ensuring comfortable domestic liquidity conditions.
Gross market borrowing of the Centre for 2021-22 is budgeted at ₹12 lakh crore. As the government’s debt manager and banker, the RBI will ensure the orderly completion of the market borrowing program in a non-disruptive manner.
TLTRO on Tap Scheme – Inclusion of NBFCs
Given that NBFCs are well recognized conduits in reaching out to the last mile in various sectors, it is now proposed to provide funds from banks under the TLTRO on Tap scheme to NBFCs for incremental lending to the specified stressed sectors.
Restoration of CRR
On a review of monetary and liquidity conditions, it has been decided to gradually restore the CRR in 2 phases in a nondisruptive manner to 3.5% effective from 27 March 2021 and 4% effective from 22 May 2021. CRR normalization opens up space for variety of market operations of the RBI to inject additional liquidity.
Marginal Standing Facility
On 27 March 2020 banks were allowed to avail of funds under the marginal standing facility (MSF) by dipping into the Statutory Liquidity Ratio (SLR) up to an additional 1% of net demand and time liabilities (NDTL). This facility, which was extended in phases up to 31 March 2021, will now be available for a further period of six months to provide comfort to banks on their liquidity requirements. This dispensation provides increased access to funds to the extent of ₹1.53 lakh crore.
SLR Holdings in Held to Maturity (HTM)
In order to provide certainty to the market participants in the context of the borrowing program of the centre and states for 2021-22, it has now been decided to extend the dispensation of enhanced HTM of 22% up to 31 March 2023 to include securities acquired between 1 April 2021 and 31 March 2022. The HTM limits would be restored from 22% to 19.5% in a phased manner starting from the quarter ending 30 June 2023. It is expected that banks will be able to plan their investments in SLR securities in an optimal manner with a clear glide path for restoration of HTM limits.
Credit to MSME Entrepreneurs
Scheduled commercial banks will be allowed to deduct credit disbursed to ‘New MSME borrowers’ from their NDTL for calculation of CRR. For the purpose of this exemption, ‘New MSME borrowers’ would be those who have not availed any credit facilities from the banking system as on 1 January 2021. This exemption will be available for exposures up to ₹25 lakh per borrower for credit extended up to the fortnight ending 1 October 2021.
Capital Conservation Buffer
It has been decided to defer the implementation of last tranche of the Capital Conservation Buffer (CCB) of 0.625% and also defer the implementation of Net Stable Funding Ratio (NSFR) by another six months from 1 April 1 to 1 October 2021.
Review of the Regulatory Framework for Microfinance
In view of the evolving role of the sector and the need for a robust framework for enhanced delivery of last mile credit and strengthening consumer protection, the RBI will come out with a consultative document harmonizing the regulatory frameworks applicable to various regulated lenders (NBFC-Micro Finance Institutions, Scheduled Commercial Banks, Small Finance Banks and NBFC–Investment and Credit Companies) in the microfinance space.
Expert Committee on UCBs
The RBI has undertaken several measures in the recent past to strengthen the urban cooperative banks and deepen financial inclusion. The recent amendments to the Banking Regulation Act, 1949 have brought near parity in regulatory and supervisory powers between Primary (Urban) Cooperative Banks and commercial banks, including those related to governance, audit and resolution. An Expert Committee will be constituted to provide a medium-term road map for strengthening the sector leveraging on the legislative amendments. Constitution of the EC and its terms of reference will be announced shortly.
Remittances to IFSCs
To further develop IFSCs and bring them at par with other international financial centres, it is proposed to permit resident individuals to make remittances to IFSCs for investment in securities issued by non-resident entities in IFSCs. For this specific purpose, resident individuals would be allowed to open a non-interest-bearing Foreign Currency Account (FCA) in IFSCs.
Deepening Financial Markets
The Central Government and the RBI have taken several measures to encourage retail investment in government securities. These include introduction of non-competitive bidding in primary auctions, permitting stock exchanges to route primary purchases and allowing a specific retail segment in the secondary market. In continuation of these efforts, it is proposed to provide retail investors with online access to the government securities market – both primary and secondary – directly through the Reserve Bank (‘Retail Direct’). This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market. This is a major structural reform placing India among select few countries which have similar facilities. This measure together with HTM relaxation, will facilitate smooth completion of the government borrowing program in 2021- 22.
FPIs’ Investment in Defaulted Bonds
In order to further promote investment by foreign portfolio investors (FPIs) in corporate bonds, FPI investments in defaulted corporate bonds will be exempted from the short-term limit and the minimum residual maturity requirement under the Medium-Term Framework.
24×7 Helpline for Digital Payment Services
With enhanced penetration and efficiency of digital payments, major payment system operators would be required to facilitate setting up of a centralized industrywide 24×7 helpline for addressing customer queries in respect of various digital payment products and give information on available grievance redress mechanisms. Going forward, the facility of redress of customer grievances through the helpline shall be considered. This is envisaged to enhance consumer trust and confidence in the digital payments ecosystem.
Guidelines on Outsourcing
The resilience of the of the digital payments ecosystem to operational risks needs to be constantly upgraded. A potential area of operational risk is associated with outsourcing by payment system operators (PSOs) and participants of authorized payment systems. To manage the attendant risks in outsourcing and ensure that a code of conduct is adhered to while outsourcing payment and settlement related services, the Reserve Bank shall issue guidelines on outsourcing of such services by these entities.
Cheque Truncation System
It is, however, noticed that about 18,000 bank branches are still outside any formal clearing arrangement. It is now proposed to bring all these branches under CTS clearing by September 2021. With this measure, all bank branches in the country would be covered under the CTS. This will enhance customer convenience and bring in operational efficiency to paper based clearing system.
Consumer Protection
To make the Ombudsman mechanism simpler, efficient and more responsive, it has been decided to integrate the three Ombudsman schemes and introduce centralised processing of grievances following a ‘One Nation One Ombudsman’ approach. This is intended to make the process of redress of grievances easier by enabling the customers to register their complaints under the integrated scheme, with one centralised reference point. The Integrated Ombudsman Scheme will be rolled out in June 2021.
A.K. Das, MD and CEO of Bank of India said complementing the measures taken in the Union Budget, the policy with an accommodative stance, sets the tone for faster economic recovery. Status quo on rates and favourable outlook for inflation will create conducive scenario for deepening financial market, he said, adding continued regulatory support for borrowing program shall also stabilise the course ahead.
Lakshmi Iyer, CIO – Debt and Head – Products, Kotak Mahindra Asset Management Co, said the RBI policy statement is dovish despite increase in inflation forecast for H1 as focus remains on growth revival. “Bond markets were looking for explicit indications on OMO/OT front, which wasn’t given, hence markets were a tad disappointed. Providing retail investors a direct option to invest in government securities is a good development from a long term perspective. Yields to trade range bound from here on and OMOs to determine support for Gsec yields,” she added.
She also said: “We continue to believe we have come to an end to rate cycle. However, liquidity will remain accommodative. The focus will be on absorbing elevated supply of government paper through OMOs and banks (extension of HTM limit of 22% to March 2023). We believe the growth estimates may be revised upwards given the underlying economic momentum.
