It is quite timely that the government and regulators are looking closely at cryptocurrency. The interesting part is that it does not come under SCRA and hence SEBI is not involved. It does not involve financial institutions and hence RBI is out. It has not been declared illegal by the Courts and hence the government cannot do anything as of now. It is a unique fad because it is prevalent across the world and more importantly it trades without there being any underlying value.
Crypto is a creation of the imagination which is protected by technology and brought on to several platforms which enables trading. Anyone can start their own crypto, but multitude of people need to believe in it and start trading. Not surprisingly even though there are over 7,000 such currencies not more than 10 are actively traded and command value. Clearly lots of people have tried floating their imaginary currencies and have failed. It runs on belief and trust with no regulators to lay down the rules.
Two things stand out here which needs to be answered by regulators.
First, is whether it is being used as a mode of transaction. Currently there is no information if people are buying and selling property and paying partly in crypto currency. If such things are happening, then it is something the RBI should be concerned about, because we cannot have parallel currencies in the country. It is illegal to carry out transactions in foreign currency in India and while barter exists in some pockets it is not the rule. If a crypto is allowed to become a currency for transactions, then it will undermine monetary policy and the entire system of payments will go for a toss. And finally in case there is a crash in value, the investors will lose money for which there is no recourse.
Also, there is need to know more on how these transactions take place. There are exchanges which allow one to trade; and it is still unclear whether the transactions are in rupees and remain in this currency or get converted to dollars. If it is in rupees and mimics what happens to the crypto globally then it is not serious, but if there are conversions into dollars then there would be a FEMA rule to contend with.
The exchanges which promote trading in crypto are transparent in terms of doing a KYC of all players. This aspect needs to be clear because if there is conversion into dollars at any stage it needs to be within the guidelines put by the RBI.
Investment option
The second aspect is the investment option. If cryptos are being used as an investment option by people, then the nature of debate changes. The exchanges vouch that there is KYC done for every customer and that all taxes are paid on the gains. It is still not clear if the gains come under short or long term and the I-T Department will have to decide on this issue.
The broader issue is that if one can trade in imaginary currencies it does tantamount to gambling which is partly permitted in the country. Horse racing and the bets that go along with this avocation is legitimate as are lotteries. Casinos can operate in some States. If trading in cryptos fall in this category, then as an extension it can be argued that people should be allowed to gamble on cricket matches too and there should be a level playing field.
Therefore, there is need to do a deep dive analysis into this entire issue of crypto currency as the level of interest is high and increasing. Part of the reason is that people want to make quick money and the present avenues of savings — bank deposits which give a paltry return — makes these alternatives alluring. Allowing such investments also risks savings getting diverted for speculative purposes which is not good for an economy which normally has a big gap in savings and investments.
Besides people investing should know what they are up against. SEBI runs strong campaigns along with the stock exchanges to caution investors on trading as well as investing in mutual funds which all have ‘underlying’ products like shares, commodities or bonds. For something fictional, people need to know what they are up against, because when there is a crash there can be an issue. The price of bitcoin had risen from $8,527 on March 1, 2020 to a high of $62,986 on April 15, 2021 and then fell to $30,822 on July 20, 2021. It again crossed $67,000 on November 9. Intuitively it can be seen that there would be several gainers and losers in this game and those who are in the latter category could be the ones who have been lured by the lucre.
Threat for central banks
Globally this has become a wave which cannot be stopped. Some states in the US accept bitcoins for transactions as do some of the Nordic countries. It is not a good precedent for central banks which will see their power over monetary policy getting denuded. Interestingly, the concept of crypto emerged on the premise that central banks and governments mismanage money and make them worthless with loose policies. This made the concept of bitcoin enticing driving its popularity.
The fear of a backlash at some point of time is palpable and this concept can be likened to a Frankenstein which may be hard to push back once it grows roots in the system. Ideally a call should be taken for sure to make it illegal for transactions as this strikes the edifice of not just the financial system but also monetary policy. On whether it should be allowed as a form of gambling, there can be further debate.
The government need not be concerned over people who are aware of the downside of cryptos, but the less financially literate need to be educated just as it is done for sin products. Maybe a bold print saying ‘trading in crypto can be bad for your financial health’ can be the beginning.
The writer is an independent economist and author of: Hits & Misses: The Indian Banking Story. Views expressed are personal
India, which is experiencing robust economic recovery although uneven across sectors, has decided to remain accommodative in its monetary policy, the Reserve Bank of India Governor told the international community on Thursday.
India is witnessing a very robust economic recovery, but there is still unevenness across sectors, RBI Governor Shaktikanta Das said in his address to the annual meeting of the International Monetary Fund and the World Bank.
“We have therefore decided to remain accommodative in our monetary policy, while being closely watchful of the evolving inflation scenario,” Das said in the short video.
Even as the Monetary Policy Committee (MPC) decided to keep the repo rate unchanged and retain the accommodative policy stance to support economic recovery, the Reserve Bank of India on Friday stepped up the focus on liquidity management.
The central bank outlined measures for a calibrated draining out of surplus liquidity from the banking system via enhanced variable rate reverse repo (VRRR) auctions of 14 days and suspending G-SAP (Government Security Acquisition Programme).
On the repo rate, the MPC voted unanimously to maintain the status quo. But the decision to retain the accommodative policy stance was voted 5 to 1 with Jayanth R Varma dissenting. Members had voted on similar lines at the Augustmeeting.
The policy repo rate has been static since May 2020, when it was reduced from 4.40 per cent to 4 per cent. Explaining the rationale for holding the rate, RBI Governor Shaktikanta Das said, “Growth impulses seem to be strengthening and we derive comfort from the fact that the inflation trajectory is turning out to be more favourable than anticipated.”
Liquidity normalisation
In view of the liquidity overhang in the banking system of more than ₹13-lakh crore, the RBI said it will conduct 14-day VRRR auctions and also stop G-SAP. It announced a fortnightly calendar for VRRR auctions.
These two steps indicate that the central bank is preparing to drain out surplus liquidity. “Our entire approach is one of gradualism. We don’t want suddenness. We don’t want surprises,” Das said. “…And more so, we do realise that as we are approaching the shore, when the shore is so close, we don’t want to rock the boat because we realise that there is a life, there is a journey beyond the shores.”
On Friday, the RBI rolled out the first VRRR auction, whereby it sucked out ₹4-lakh crore. The size of each subsequent fortnightly auction will be increase by ₹50,000 crore, culminating in a ₹6-lakh-crore VRRR auction on December 3. Depending upon the evolving liquidity conditions — especially the quantum of capital flows, the pace of government expenditure and the credit offtake — the RBI may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions in a similar calibrated fashion, the Governor said.
MD Patra, Deputy Governor, said: “Now, the (VRRR) auctions have two benefits for us — they enable better pricing of excess reserves and they give the RBI a better handle on these reserves by giving some more discretion in managing liquidity.”
Even with all these operations, the liquidity absorbed under the fixed rate reverse repo would be ₹2-3 lakh crore in the first week of December.
Rajkiran Rai G, Chairman of Indian Banks’ Association and MD & CEO of Union Bank of India, said: ”As was widely expected, the RBI has given a roadmap for the tapering of the excess liquidity from the system in a calibrated manner without disrupting the government borrowing programme or the liquidity needs of the economy.
Crisil, in a report, noted that the normalisation could continue in the coming months and a hike in the repo rate by 25 basis points by fiscal 2022-end, assuming strengthening economic recovery and elevated inflation risks. The MPC revised downwards its retail inflation projection for FY22 to 5.3 per cent against the earlier 5.7 per cent even as it retained its projection for real GDP growth at 9.5 per cent.
Amidst uneven growth recovery and concerns over a spike in inflation, the Monetary Policy Committee of the Reserve Bank of India chose to maintain a status quo on key rates. It also continued with its accommodative stance to support growth.
“The MPC voted unanimously to maintain status-quo about policy repo rate and by a majority of 5:1 to maintain the accommodative stance,” said RBI Governor Shaktikanta Das, who chairs the MPC, adding that the stance remains accommodative to revive and maintain growth.
The repo rate stands at 4 per cent and the reverse repo rate at 3.35 per cent. MSF rate and bank rate remain unchanged at 4.25 per cent.
The six-member MPC held its bi-monthly monetary policy meeting between October 6 and October 8.
This was Das’s 12th statement since the onset of the pandemic, of which two were made outside of the monetary policy cycle. On two occasions- March and May, the MPC had to take pre-emptive action.
“The RBI has taken over 100 measures to proactively and decisively respond to the unprecedented crisis. We have not been a prisoner of any rule book,” Das said in his opening comments.
The Reserve Bank had last cut the repo rate by 40 basis points in May 2020 but has maintained the status quo on rates since then.
Reverse repo rate remains at 3.35%, Marginal Standing Facility Rate and Bank Rate at 4.25% while the projection for India’s real Gross Domestic Product (GDP) is maintained at 9.5 per cent for FY22, RBI Governor Shaktikanta Das said while announcing the monetary policy review.
Inflation target raised
RBI has raised the CPI inflation estimate for FY22 to 5.7% from 5.1%.
“CPI inflation surprised on the upside in May; price momentum however moderated. Outlook for aggregate demand is improving but underlying conditions are still weak. More needs to be done to restore supply-demand balance in no. of sectors.
He said the recent inflationary pressures are evoking concerns but the current assessment is that these are transitory.
“We are in n a much better position as compared to June 2021. Need to remain vigilant on the possibility of a third wave,” he said.
Retail inflation print stayed above the upper band of the Reserve Bank of India’s 2-6% target for the second straight month in June, causing the stakeholders to watch its moves more intently. RBI started easing the policy rate since February 2019; it adopted ‘accommodative’ monetary policy stance in June 2019 and has since maintained it, given the grave challenge to economic growth due to the pandemic. Governor Shaktikanta Das expounds on the current priorities of the central bank, which is also the government’s debt manager, in an exclusive interview with Shobhana Subramanian and KG Narendranath.Excerpts:
Is the latest retail inflation number (6.26% in June, upon a high base of 6.23%) a cause for worry or has it come as a relief (given it eased a tad from a six-month high of 6.3% in May)? How long will the RBI be able to retain the growth-supportive bias in the conduct of monetary policy?
The CPI inflation number for June is on expected lines. The year-on-year growth in ‘core’ inflation (eased marginally to 6.17% in June compared with 6.34% in May. The momentum of the CPI inflation has come down significantly in the both headline and core inflation in June.
The current inflation is largely influenced by supply-side factors. High international commodity prices, rising shipping charges and elevated pump prices of diesel and petrol (which are partly due to high taxes) are putting pressure on input prices. Prices of several food items including meat, egg, fish, pulses, edible oils, non-alcoholic beverages have risen too.
Supply-chain constraints have also arisen out of the Covid 19 related restrictions on movement of goods, and these are easing slowly. Over the last few months, the government has taken steps to address the price rise in pulses, edible oils as also the imported inflation, but we do expect more measures from both the Centre and states to soften the pace of inflation.
Last year, in July and August, CPI inflation was in excess of 6%; in September and October, it was in excess of 7% and in November, almost 7%. That was the time when the Monetary Policy Committee (MPC) had assessed that the spike in inflation was transitory and it would come down going forward. In hindsight, the MPC’s assessment was absolutely correct. Now, the MPC has assessed that inflation will moderate in Q3FY22, so I emphasise on the need to avoid any hasty action. Any hurried action, especially in the background of the current spike in inflation being transitory, could completely undo the economic recovery, which is nascent and hesitant, and create avoidable disruptions in the financial markets.
At 9.5% (real GDP) growth projected by us for FY22, the size of the economy would just about be exceeding the pre-pandemic (2019-20) level. Given that growth is still fragile, the highest priority needs to be given to it at this juncture.
We need to be very watchful and cautious before doing anything on the monetary policy front. Also, all this we have to see in the context of the truly extraordinary situation that we are in, due to the pandemic. It is not like any other year or occasion, when inflation goes up, you start tightening the monetary policy.
The Centre’s fiscal deficit is high (the budget gap more than doubled to 9.3% of GDP in FY21 and is projected to be 6.8% this year), but given the huge revenue shortfall, the size of the fiscal stimulus is limited and not adequate to push growth. Yet, the RBI needs to focus a lot on the yield curve to ensure that the government’s borrowing cost doesn’t skyrocket. Some would say the RBI’s debt management function is taking precedence over its core function, which is inflation-targeting. Is the RBI open to creating new money to directly finance the fiscal deficit?
I would not agree with the formulation that debt management is undermining inflation-targeting. In fact, our debt management operations throughout the past year and more has ensured better transmission of monetary policy decisions. We are using the instruments at our command to ensure transmission of rates. Thanks to our debt management operations, the interest rates on government borrowings in 2020-21 were the lowest in 16 years, and private-sector borrowing costs have also substantially reduced. If the real estate and construction sectors are out of the woods now, the all-time low interest rates on housing loans have had a big role in it.
We have not only reduced interest rates in consonance with monetary policy, but have also ensured availability of adequate – even surplus– liquidity in the system through OMO, Operation Twist and GSAPs. These have resulted in lower borrowing costs and financial stability across the entire gamut of stakeholders including banks, NBFCs and MFIs, and, therefore, been very supportive to economic growth.
If you look at the M3, the growth of money is just about in the range of 9-10%, meaning our accommodative stance is not really creating high inflation.
As far direct financing of the government’s fiscal deficit is concerned, this apparently easy option is out of sync with the economic reforms being undertaken; it is also in conflict with the FRBM law. In fact, this option has several downsides and the RBI has refrained from it.
What’s important is the (high) efficiency with which the RBI is meeting the borrowing requirement of the government. The Centre and states, among themselves, borrowed about Rs 21-22 lakh crore, a record high amount in FY21, but at historical-low interest rates. In the current year too, there could be a borrowing quantum of the same order, and the RBI will use all the tools at its disposal to ensure that the borrowings are non-disruptive and at low interest rates.
There is ample liquidity in the system, yet the banks appear to be extremely risk-averse. They would rather park the excess funds under the reverse repo window, than lend to the industry. Even the government’s schemes like ECGLS – which insulates banks from credit risk on loans to MSMEs and retail borrowers – and the targeted liquidity policy of RBI for small NBFCs don’t seem to change the outlook much. As the regulator, how do you get this fear psychosis out of banks?
The banks have to do prudent lending with proper appraisals. Risk aversion on the part of the banks is arising from the current pandemic situation, and its possible consequences. Demand for credit from the industry is also not as high as one would expect it to be. This is because there is still a large output gap that constrains new investments.
Many large companies considerably deleveraged their bank loans in FY21, while raising money from the corporate bond market. So banks have to lend where there is a demand, and that is one reason why lending to retail sector is growing. There is no gainsaying that bank credit needs to rise; I’m sure banks will indeed lend if there is demand for credit and the projects are viable.
There is a lot of demand for loans from companies that are relatively low-rated. Banks are not willing to take any risk…
Of course, the risk perception (among lenders) is high and, precisely for that reason, the government unveiled the ECLGS scheme (under which guaranteed loans up to a limit of Rs 4.5 lakh crore will be extended). If you see our TLTRO scheme or the refinancing support (special facilities for Rs 75,000 crore were provided last year to all India financial institutions, including Nabard and SIDBI; a fresh support of Rs 50,000 crore has been provided for new lending in FY22), the objective is that they would lend to small and micro businesses. We have also given Rs 10,000 crore to small finance banks and MFIs at the repo rate (4%), again to ensure adequate fund flow to micro and small firms.
As for the healthcare sector, banks are allowed to park their surplus liquidity up equivalent of the size of their Covid loan books with the RBI at a higher rate. We are also according priority-sector status to certain loans for the healthcare sector. So, because of the extraordinary situation, we are incentivising the banks to lend more through a series of measures.
As the regulator, our job is to provide an ecosystem where the banking sector functions in a very robust manner. But beyond that, who the banks will lend to or won’t lend to must be based on their own risk assessment, and the prudential norms.
In the recent financial stability report (FSR), the worst-case NPA scenario after the full withdrawal of forbearance is foreseen to be better than the best case perceived in the January edition…
We had a much clearer view of the assent quality in the July FSR than when the January edition was drafted, when the regulatory forbearance partially blurred the picture. Still, these are assumptions and analytical exercises rather than projections. These could serve as guidance to the banks in their internal analysis of, say, a possible severe stress scenario. We expect the banks could use these inputs to take proactive, pre-emptive measures on two fronts specifically: increasing the provision coverage ratio and mobilsing additional capital to deal with situations of stress or a severe stress, should these happen.
These assumptions, based on real numbers, could by and large hold true, unless a third Covid-19 wave plays spoilsport.
In the auction held on Friday, you allowed the benchmark yield to go up to 6.1%, while it had long seemed you won’t tolerate a rate above 6%…
We’ve never had any fixation that the yield should be 6%, but some of our actions might have conveyed that impression. After the presentation of the Budget (for FY22) and other developments such as the enhanced government borrowing, the bond yields suddenly spiked. The 10-year G-secs, for example, reached 6.26%. But after that, through our signals and actions (in the form of open market operations, Operations Twist and G-SAP, and our actions during auctions, going sometimes for the green-shoe option or sometime for cancellations, etc) we signalled our comfort level to the markets.
So, we are able to bring down the yield and the rates, by and large, remained less than 6% till about January or so. The first auction that we did last Friday when we introduced the new-tenure benchmark reflected one important thing that the focus of the central bank is on the orderly evolution of the yield curve and the market expectations seem to be converging with this approach. So, it will be in the interest of all stakeholders, the economy, if the same spirit of convergence between the market participants and other stakeholders, and the central bank continues and I expect it will continue.
A jump in the RBI’s ‘realised profits’ from sale of foreign exchange enabled you to transfer a higher-than-expected Rs 99,122 crore as surplus to the government for the nine months to March 31, 2021. Are you sticking to the economic capital framework as revised on the lines of the Bimal Jalan committee’s recommendations?
One of the key recommendations of the committee is that unrealised gains will not be transferred as a part of surplus and we are strictly following that. We intervene in the market to buy and sell foreign currencies, and what we earn out of that are realised gains. A large part of the surplus transfer constitutes the exchange gains from foreign exchange transactions. So whatever gains we make out of this are not unrealised (notional) gains (which can’t be transferred under ECF). We also make losses in such transactions, because RBI isn’t in the game of making profit but in the game of maintaining stability of the exchange rate and ensuring broader financial stability.
Last year, about Rs 70,000 crore had to be transferred to the contingency reserve fund because it was falling short of the 5.5% level recommended by the Jalan committee. This was because our balance sheet size grew substantially last year due to liquidity operations that we undertook in March, April and May. So, last year the larger size of the RBI’s balance sheet required that as much as Rs 70,000 crore be transferred to the contingency reserve fund. This year, the expansion of balance-sheet wasn’t that much, so the transfer was much less at about Rs 25,000 crore.
The share of outstanding loans linked to external benchmarks increased from as low as 2.4 per cent during September 2019 to 28.5 per cent during March 2021, contributing to significant improvement in monetary policy transmission on the back of persisting surplus liquidity conditions, according to an article in the Reserve Bank of India’s monthly bulletin.
Notably, the outstanding loans (linked to both fixed and floating interest rates) in personal and micro, small and medium enterprise (MSME) segments accounted for 35 per cent of the outstanding loans as at end-March 2021, the article “Monetary Policy Transmission in India: Recent Developments” said.
Quarterly periodicity in re-setting interest rates for outstanding loans linked to external benchmark as against annual for MCLR (marginal cost of funds based lending rate) linked loans has contributed to the improvement in pass-through to lending rates on outstanding loans, opined RBI officials Avnish Kumar and Priyanka Sachdeva.
The article said monetary policy transmission is a process through which changes in the Central bank’s policy rate are transmitted to the real economy in pursuit of its ultimate objectives of price stability and growth.
External benchmark
RBI mandated all scheduled commercial banks (excluding regional rural banks) to link all new floating rate personal/ retail loans and floating rate loans to micro and small enterprises (MSEs) to an external benchmark with effect from October 1, 2019. This was extended to medium enterprises, effective April 1, 2020.
The external benchmark could be the policy repo rate or 3-month T-bill rate or 6-month T-bill rate or any other benchmark market interest rate published by the Financial Benchmarks India Private Ltd (FBIL).
Internal benchmark for pricing of loans
The authors emphasised that legacy of internal benchmark linked loans (Benchmark Prime Lending Rate, base rate and MCLR) – which together comprised 71.5 per cent of outstanding floating rate rupee loans as at March-end 2021 – impeded transmission. The share of loans linked to MCLR stood at 62.9 per cent as of March 2021.
“The opacity in interest rate setting processes under internal benchmark regime hinders transmission to lending rates, although the EBLR regime is indirectly also leading to moderate improvement in transmission to MCLR based loan portfolio,” the authors said.
The pandemic response saw a tight interaction of monetary and fiscal policy. As monetary policy has sought to control a larger segment of the yield curve, the overlap with public debt management has grown, noted RBI’s Financial Stability Report for July.
It noted that with monetary policy committed to an easy stance for some time in many countries, the fiscal stance becomes important.
Too loose a fiscal stance could cause inflation surprises and financial conditions could tighten, it said, adding that a more constrained fiscal policy would add pressure on monetary policy.
“It would test the efficacy of further monetary expansion and could heighten intertemporal tradeoffs,” it said.
The extraordinary combination of high debt-to-GDP ratios and ultra-low interest rates raises three challenges, said the central bank’s report, with the first being the risk of fiscal dominance.
Further, it may also lead to a situation where fiscal positions may ultimately prove unsustainable and the complications of the possible joint “normalisation” of fiscal and monetary policies would also crop.
Growth-friendly fiscal policy, the RBI suggested, can help by effectively targeting public infrastructure and productivity.
The status quo on rates and the accommodative stance of the Reserve Bank of India will help revive growth amidst the second wave of the Covid-19 pandemic, bankers said.
“The RBI approach to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis is quite encouraging. Given the challenging situation, the status quo on signal rates is on the expected line,” said Raj Kiran Rai, Chairman, Indian Banks’ Association and Managing Director and CEO, Union Bank of India.
Dinesh Khara, Chairman, State Bank of India, said the coordinated and active efforts of the RBI and government will support growth on a more durable basis during these difficult times
“The policy announcements of the RBI are clearly focused on extending liquidity support to stressed sectors by a more equitable distribution. The growth and inflation numbers have been revised looking at the current uncertain environment. The policy announcements are unequivocal in supporting growth through liquidity and market interventions through Regional Rural Banks and also by fast tracking resolution of stressed MSME sector,” he said.
“The decision of keeping the repo rate unchanged along with maintenance of accommodative stance is on expected lines and necessary to mitigate the growth uncertainty and inflation concerns,” said SS Mallikarjuna Rao, Managing Director and CEO, Punjab National Bank.
Zarin Daruwala, Cluster CEO, India and South Asia markets (Bangladesh, Nepal and Sri Lanka), Standard Chartered Bank, said, RBI’s reiteration of its accommodative stance till economic growth recovers, should help ease financial conditions and cap interest rates.
“RBI continued its focus on targeted credit delivery to sectors in need of liquidity by augmenting the special liquidity window to SIDBI for on-lending to MSMEs and by providing Banks with subsidised on-tap liquidity for on-lending to COVID intensive sectors,” she further noted.
Economists said a further downward revision in the RBI’s growth projection of 9.5 per cent for 2021-22 is possible while inflation may be higher than the estimated 5.1 per cent.
“The second wave of the pandemic, apart from immediate loss of economic activity, will likely also result in medium-term headwinds in recovery in business and consumer confidence. While the RBI has lowered their 2021-22 growth forecasts today by 1 percentage point, one feels further material downside to the same remains a possibility,” said Siddhartha Sanyal, Chief Economist and Head – Research, Bandhan Bank.
“We think a critical mass of the population will be vaccinated by December, and the rise in activity and demand will give producers the confidence to pass on higher input costs to consumers, putting upward pressure on core inflation,” said a note by HSBC Global Research.
However, as long as CPI inflation remains under 6%, we are not expecting a repo rate hike in the foreseeable future, or for as long as private investment remains subdued, it further said.
Even as it left the policy repo rate unchanged, the Reserve Bank of India decided to open the liquidity tap a bit more, this time aggregating ₹31,000 crore, to help MSMEs, especially those in contact-intensive sectors as Covid-19 second wave rages on.
The central bank decided to open an ‘On-tap Liquidity Window’ aggregating ₹15,000 crore till March 31, 2022 for sectors, including hotels and restaurants, tourism, and aviation ancillary services. Other services, including private bus operators, car repair services, car rentals, event/conference organisers, spa clinics and beauty parlours/salons will also benefit. All these services were badly impacted by the pandemic, the RBI’s latest Annual Report had acknowledged.
“We will continue to think and act out of the box, planning for the worst and hoping for the best. The measures announced today, in conjunction with other steps taken so far, are expected to reclaim the growth trajectory from which we have slid,” said RBI Governor Shaktikanta Das.
Banks can tap this window to get funds with tenors of up to three years at the repo rate (4 per cent) to provide fresh lending support to these contact-intensive sectors. By way of an incentive, banks will be permitted to park their surplus liquidity up to the size of the loan book created under this scheme with the RBI under the reverse repo window at a rate that is 40 basis points higher than the reverse repo rate (of 3.35 per cent).
Funds for SIDBI
The central bank will also extend a special liquidity facility of ₹16,000 crore to the Small Industries Development Bank of India (SIDBI) to support the funding requirements of MSMEs, particularly smaller units and other businesses including those in credit-deficient and aspirational districts.
SIDBI can tap this facility for on-lending/refinancing through novel models and structures. “This facility will be available at the prevailing policy repo rate for one year, which may be further extended depending on its usage,” Das said.
The Governor observed that to nurture the still nascent growth impulses and ensure continued flow of credit to the real economy, the RBI had announced fresh support of ₹50,000 crore on April 7 to All India Financial Institutions (AIFIs) for new lending in 2021-22. This included ₹15,000 crore to SIDBI.
Restructuring framework
The RBI decided to expand the coverage of borrowers under the Resolution Framework 2.0 by enhancing the maximum aggregate exposure threshold from ₹25 crore to ₹50 crore for MSMEs, non-MSME small businesses and loans to individuals for business purposes. This opens the Framework to a larger set of borrowers.
Recognising that the second wave could pose difficulties in loan servicing, the RBI had unveiled the Framework, which allows restructuring of loans taken by individuals, small businesses and MSMEs.
These measures, among a host of others, came even as the Monetary Policy Committee (MPC) stood pat on the policy repo rate.
By leaving the repo rate unchanged, the committee sought to strike a balance between the need to tamp down inflationary pressures being exerted by rising international commodity prices, especially of crude, and logistics costs, and support economic activity, currently hobbled by the adverse impact of the second wave.
All six MPC members unanimously voted to keep the policy repo rate at 4 per cent and continue with the accommodative stance. The repo rate has been static since May 2020.
Risk from rural spread
“Maintaining financial stability and congenial financing conditions for all stakeholders is a commitment that we have adhered to assiduously,” Das said.
“The sudden rise in Covid-19 infections and fatalities has impaired the nascent recovery that was underway, but has not snuffed it out. The impulses of growth are still alive,” he said. He cautioned that the increased spread of Covid to rural areas, however, poses downside risks to the growth outlook.
FY22 GDP growth lowered
The MPC cut the real GDP growth projection to 9.5 per cent in 2021-22 against its earlier forecast of 10.5 per cent. Retail inflation has been projected at 5.1 per cent during 2021-22 (against earlier projection of 5 per cent), with risks broadly balanced.
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