Tag: pandemic

How did a start-up win a rare banking license in India?

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BharatPe, a barely three-year-old payments start-up, is going to be the half-owner of a bank in India — a prize that has eluded many of the country’s pedigreed tycoons.

It’s a lucky break. Even Jaspal Bindra, who’ll own the other half, has had to wait six years for this chance, ever since his reign as the top Asia banker at Standard Chartered Plc ended amid a heap of losses in India and Indonesia.

Also read: PMC Bank’s resolution could become a template for rescuing other weak UCBs

The in-principle approval for BharatPe and Bindra is a marriage made in heaven, or rather the capital-starved hell that has been the country’s banking system for much of the past decade. The regulator is rewarding the duo for agreeing to help remove the debris of a scam-tainted small lender. Punjab & Maharashtra Co-operative Bank collapsed after it made 70 per cent-plus of its loans to one bankrupt shantytown developer. To prevent a run, the Reserve Bank of India had to stop PMC depositors from freely accessing their money.

That was in September 2019. After two years and two waves of a pandemic, the stuck savers finally have a resolution: BharatPe and a unit of Bindra’s Centrum Capital Ltd will put their financial businesses into a newly licensed bank tasked with making small-ticket loans to unbanked segments of the population. For the privilege of getting that license, the new lender will have to assume at least some of the liabilities of the troubled PMC, as well its moth-eaten assets.

It’s unclear how much of the past baggage the new bank can be expected to carry. PMC’s March 2020 deposit base of ₹10,700 crore ($1.5 billion) may have shrunk after the RBI relaxed re strictions on withdrawals in June last year. But it doesn’t have many good assets left to earn a return: About 80 per cent of its ₹4,500-crore loan book had gone bad by March last year. Depending on the deal the regulator strikes on their behalf, one option may be to sweeten PMC depositors’ take — beyond what they’ll be paid out by the deposit guarantee corporation — with some equity in the new bank.

Beyond that, it’s a clean slate. BharatPe, which allows merchants to accept payments from any of the several apps popular with consumers, is yet to join the unicorn club of start-ups with at least $1 billion in valuation. TechCrunch has reported a Tiger Global-led fund-raising round that will take it comfortably past that hurdle. The money will also come in handy in creating a new-age bank. Gauging retailers’ creditworthiness from real-time customer data, and making that the basis for pricing working capital loans, will preclude the need for a costly physical branch network.

Tens of millions of India’s small retail shops rely on personal relationships with wholesalers for credit. Bringing them under the ambit of formal lending will also draw them into the tax net, helping ease the resource crunch for a government that has seen its debt explode because of the Covid-19 crisis. For Bindra, it’s time to try something different from the old corporate banking model of financing empire-building by large conglomerates. In India, taking errant corporate debtors through a formal bankruptcy process or coming to a settlement with their politically influential owners was always like pulling teeth. Of late, extraction of capital from failed businesses has become a painful joke — yielding recovery rates of 4 per cent to 6 per cent for creditors.

In the absence of a formal mechanism to deal with bank failures, expect more bespoke arrangements. Inviting Singapore’s DBS Group Holdings Ltd to take over the assets and liabilities of struggling Lakshmi Vilas Bank Ltd offered a strong hint that the Indian central bank had learned its lesson from unsatisfactory half-rescue of YESs Bank Ltd., a major corporate lender that was allowed to hobble along as a standalone lender.

BharatPe’s unexpected bonanza could well set a template for post-Covid recapitalisation of Indian lenders. The RBI responded to the pandemic by slashing interest rates and making available nearly 7 per cent of GDP in easy liquidity. When that cheap money is eventually unwound, more banks with depleted capital coffers may need new homes. If RBI Governor Shaktikanta Das is going to reprise the anxious Mrs. Bennet from Pride and Prejudice, maybe other fintech suitors, too, will get to play Mr. Darcy.

(This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.)

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How savings were impacted by Covid second wave

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Faced with the surge of Covid-19 infections in recent months combined with lockdowns that led to job losses and drop in income, many households are understood to have started using their accumulated savings to fund expenditure.

This, in turn, has led to concerns over a decline in the savings rate that could hamper further recovery.

According to the Reserve Bank of India’s monthly bulletin for March, household net financial savings rose to 21 per cent of GDP in the first quarter of 2020-21 and fell to 10.4 per cent in the second quarter. A report by Motilal Oswal in April had said household net financial savings had likely fallen to 8.4 per cent of GDP in the third quarter last fiscal.

Anecdotal data as well as the slowdown in bank deposits indicate that household savings have been impacted by the second surge of Covid-19 infections.

Bank deposits

Deposits of commercial scheduled banks grew 9.7 per cent on an annual basis to ₹1,51,66,808.18 crore for the fortnight ended May 21, 2021 as against a 9.9 per cent growth in the fortnight ended May 7, 2021.

“Growth in deposits with scheduled commercial banks (a proxy for household saving, having about 50 per cent share in households’ overall savings portfolio), has declined starting April 2021. Last year, in contrast, deposit growth had moved up. This could be indicative of pressure on incomes and a simultaneous rise in medical expenditure given the heightened ferocity of the second wave,” said a recent report by Crisil.

People also seem to be withdrawing funds from retirement savings. By May 31, 2021, the EPFO had settled over 76.31 lakh claims under the Covid-19 advance scheme amounting to over ₹18,698.15 crore. The government has now allowed a second round of such withdrawals from the Employees’ Provident Fund.

Gold auction

Gold loan NBFCs are auctioning more gold in recent months indicating higher distress amongst borrowers. For instance, Manappuram Finance said it auctioned gold worth ₹404 crore in the fourth quarter of 2020-21 compared to ₹8 crore in the nine month period ended December 2020.

Sale of life insurance policies has also declined in recent months but there are expectations that it may revive in coming months.

“Equity markets have been performing well. It is expected that products such as mutual funds and ULIPs will continue to do well this fiscal as bank deposits have lost their sheen,” said an executive with a private insurer.

 

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DHFL case: CoC decision on shareof FD holders can set a precedent

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Amidst the ongoing Covid-19 pandemic and job losses, the National Company Law Tribunal (NCLT) has asked lenders of Dewan Housing Finance Corporation Ltd (DHFL) to reconsider the distribution of funds to fixed deposit holders and provident funds within two weeks.

Considering the number of small investors and senior citizens who had deposited their hard-earned money and who now face a financial crisis due to the pandemic, the Resolution Plan should provide for an increased share for them, the NCLT said in its order dated June 7.

“It’s generally considered that the investment in the fixed deposit, NCDs are low-risk investment [compared with investing in equity shares]. Therefore, these small investors should not be put to more risk, take more hair cut than the stronger financial institutions viz banks, financial institutions.

“Accordingly, for this limited purpose, we direct the Committee of Creditors (CoC) to reconsider their distribution method amongst various members of the CoC within two weeks from today and report the same to this Adjudicating Authority,” the NCLT said.

Legal experts said that the NCLT has only made a request to the CoC and the final decision will be taken by the lenders. “If CoC agrees to give more to the FD holders, then it could set a precedent for other insolvency cases,” said a legal expert.

Nakul Sachdeva, Partner, L&L Partners (formerly Luthra & Luthra Law Offices), said it seems that the NCLT, on compassionate grounds, has requested the CoC to reconsider the distribution of funds while holding that the plan is in accordance with the law.

However, many of the fixed deposit holders and the NCD holders plan to appeal in the National Company Law Appellate Tribunal seeking full recovery of their deposits.

While approving the resolution plan for DHFL, the NCLT, however, made it clear that there is no additional monetary obligation for the Piramal Group to pay anything more than what it has committed in the Resolution Plan, which is ₹37, 250 crore. “It is only an inter se distribution of resolution money amongst various creditors,” the NCLT said. Significantly, the NCLT has also told the CoC to reconsider the claim of the Army Group Insurance Fund and pay the full admitted claim amount of ₹39 crore, which amounts to just 0.0001 per cent of the total plan.

Army group

The suggestion by the NCLT came “considering the nature of duties performed by them who are protecting the nation, sacrificing their lives, difficult working conditions and human service to keep peace of the country.”It would be appropriate for the members of the CoC “to reconsider and repay their entire admitted claim without any hair cut thereby expressing our deep concern, gratitude and respect to the Army Personnel,” it said.

The NCLT also noted that the Army Group did not challenge/oppose the plan and has only sought a sympathetic view of the CoC.

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10-year G-Sec auction sees devolvement

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Government securities (G-Secs) prices rose on Friday despite the Reserve Bank of India (RBI) devolving the 10-year benchmark G-Sec on primary dealers (PDs) at the weekly auction.

Market participants attributed this to the aforementioned security being among the six G-Secs RBI will be buying under the third tranche of open market purchase of G-Secs under the G-Sec Acquisition Programme (G-SAP 1.0).

Though the cut-off price at the auction of the 10-year G-Sec came in at ₹98.97 — about 19 paise higher than previous closing price (of ₹98.7850) — bond dealers say many of the bids would have been below Thursday’s closing price, leading to devolvement of the paper PDs.

PDs, who underwrite G-Sec auctions, had to pick up ₹9975.763 crore worth of this paper out of the total notified amount of ₹14,000 crore.

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said the central bank has kept the yield on the 10-year on a tight leash in view of the large Government borrowing programme amid the Covid-19 pandemic, while the market players want it to leave the yields to market forces.

Keeping yields in check

Irani observed that G-Sec prices did not fall despite devolvement of the 10-year G-Sec on PDs as market participants know that RBI will buy this security through G-SAP.

In the secondary market, the benchmark 10-year G-Sec coupon rate: 5.85 per cent) rose 9 paise to close at ₹98.875 (previous close ₹98.785), with the yield declining about a basis point to 6.0072 per cent (6.0199 per cent).

Bond yield and price are inversely related and move in opposite directions.

The auction of the other two G-Secs — 4.26 per cent GS 2023 and 6.76 per cent GS 2061 — sailed through.

Under G-SAP, RBI commits upfront to a specific amount of open market purchases of G-Secs with a view to enabling a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions. According to State Bank of India’s economic research report “Ecowrap”, the G-SAP programme of the RBI has been largely successful in keeping the bond yields in check.

However, to make the impact more meaningful, RBI may consider shifting the focus on 7-8 year papers while announcing Open Market Operation/ G-SAP, etc., it added.

“This will smoothen the curve and also reduce upward pressure on benchmark yield. Additionally, RBI can also come up with a prior calendar of bucket-wise maturity for GSAP-2.0,” Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said.

Furthermore, more purchases might be done in illiquid securities compared to liquid securities in each bucket. Accordingly, banks will be able to offload their HTM (held-to-maturity) stocks and buy liquid ones.

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NBFC-MFIs: Risk of protracted delinquencies remains, says CRISIL

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A hit to the collection efficiency of microfinance institutions (NBFC-MFIs) owing to protracted Covid-19 curbs will increase asset-quality pressures in the sector, with loans in arrears for over 30 days likely to cross the surge in the aftermath of demonetisation (DeMon), cautioned CRISIL Ratings.

With loans in arrears for over 30 days – or the 30+ portfolio at risk (PAR) mounting, the MFI sector is expected to resort to restructuring of loans to a larger extent than last fiscal as this is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket, the credit rating agency said in a note.

CRISIL Rating assessed that the 30+ PAR could rise to 14-16 per cent of portfolio this month from a recent low of 6-7 per cent in March. This number had surged to 11.7 per cent in March 2017, in the aftermath of demonetisation.

“But unlike last fiscal, when loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India (RBI)’s Resolution Framework 2.0 announced last month, and continue with higher provisioning,” CRISIL Ratings said.

Ground level challenges

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, observed that the medical impact of the second wave of the pandemic has been much worse than the first wave, and afflictions have percolated to the rural areas too.

“Ground-level infrastructural and operational challenges, as well as restrictions on movement of people, have impinged on the MFI sector’s collection efficiency.

“Though overall collection efficiency is expected at 75-80 per cent in May, compared to 90-95 per cent in March, pressure on asset quality would be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave,” opined Sitaraman.

Considering the current ground-level challenges, the note emphasised that encouraging collections through the digital mode is imperative for MFIs – the way they have transitioned to cashless disbursements.

Restructuring, Delinquencies & Provisioning

With 30+ PAR mounting, CRISIL Ratings is of the view that the demand under restructuring 2.0 could be in high-single digits compared to 1-2 per cent seen during restructuring 1.0 for the overall sector.

“Yet, the risk of protracted delinquencies eventually leading to credit costs staying elevated, remains.

“For one, borrowers’ track record of repayment ability is yet to be established for already restructured portfolios. Two, lack of prudence is also a possibility,” the note said.

CRISIL estimates that close to half of the total assets under management (AUM) of NBFC-MFIs of about ₹80,000 crore as on March 2021, were generated from December 2020 onwards.

Given the relatively vulnerable credit profiles of borrowers and the fact that local economic activity is yet to normalise, sustainability of collections, especially for the recent disbursements, will be the key monitorable in the coming quarters, it added.

Ajit Velonie, Director, CRISIL Ratings, said: “To be sure, NBFC-MFIs have created provisions (including a special Covid-19 provision in the fourth quarter last fiscal) estimated at 3-5 per cent of the AUM as on March 2021.

“Considering the likely rise in delinquencies and restructuring, higher-than-normal provisioning is warranted even in the first half of this fiscal to absorb the shocks.”

NBFC-MFIs with adequate liquidity, lower leverage, or those backed by strong parentage, will be better placed to withstand the current situation, he added.

According to CRISIL Ratings, large MFIs rated by it are either backed by strong parentage with access to capital, or have comfortable capitalisation with gearing at about 3-3.5 times, which should allow them to withstand the stress.

They also have the liquidity to cover over two months of debt repayments – even after assuming nil collections – because disbursements have been low, too, which has helped conserve cash.

Nevertheless, the trajectory of recovery, access to incremental funding and capital position will bear watching, especially of the smaller MFIs, the agency said.

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Bharti AXA Life Insurance expects 20% growth in business in current fiscal

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Bharti AXA Life Insurance expects 20 per cent growth in business during the current fiscal backed by higher demand for protection and guaranteed plans amid the Covid-19 induced pandemic. The company had witnessed a four per cent growth in business premium at ₹2,281 crore in FY21.

According to Parag Raja, MD & CEO, Bharti AXA Life, the life insurance industry is estimated to grow 12-15 per cent during the current fiscal, as against a single digit growth it had clocked in FY21.

“The current pandemic has forced consumers to shift their mindset when it comes to life insurance as a product category. Pre covid, people generally bought life insurance for tax saving or for some for sort of obligation, but the current humanitarian crisis has forced people to start thinking about this. Our estimate is that the life insurance industry should grow by 12-15 per cent during the current fiscal and we want to outperform the industry growth,” Raja told BusinessLine.

The company’s assets under management grew by 36 per cent and renewal premium grew by 10 per cent in FY-21, which indicates that customers have understood the need for staying invested in insurance products, he said. Close to ₹1,500 crore out of the total premium of ₹2,281 crore was renewal premium.

In FY21, Covid-related claims accounted for nearly 16 per cent of the total 2,874 claims registered. In value terms, Covid related claims accounted for nearly 21 per cent of the total payout of around ₹180 crore. However, in the second wave there has been a sharp rise in claims.

“In the second wave we have already received 60-70 per cent of last years’ Covid claims in the first two months,” he said.

Growing demand

The pandemic has led to a clear shift among consumers to protection products which has hospitalisation and critical illness built into it. Moreover, consumers are not looking for too long term product and instead are willing to pay for shorter duration because of the uncertainty around personal financial position beyond five years.

Protection plans, which accounted for a meagre two-to-three per cent of the company’s total premiums, increased to five per cent by the end of last fiscal. This has further increased to around 10 per cent in the last two-to-three months.

Based on consumer insights, the company had modified seven existing products and launched three new products last year. This year again, it is looking to launch three new products one under guaranteed income platform, one on par platform and for the third one it is waiting for IRDAI’s final guidelines post which it plans to launch an index linked product subject to the regulator’s approval.

“Pure protection products are cheaper. In the new protection plans we launched we gave them option to pay for shorter period of time. We have also introduced some innovative features and giving benefits to clients who are practising healthy habits in the form of a discount,” he said.

Digital approach

According to Raja, nearly 60 per cent of consumers are researching online and purchasing offline and this trend is here to stay.

The pandemic has forced the entire industry to re-imagine business model, particularly the technology and digital solutions offered to both employees and customers. The company has launched a direct to consumer channel apart from its traditional proprietary and partnership channel. This apart, it has also launched WhatAapp servicing for customers to ensure that nearly 90 per cent of services including claims intimation can be done through the platform.

“Digital business, which currently accounts for nearly five per cent of our total sales, is expected to grow to 15-20 per cent in the next three-to-four years,” he said.

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The outlook is uncertain but use of digital will keep increasing: Tarun Chugh

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It is an uncertain time for the life insurance sector amidst the ongoing second wave of the Covid-19 pandemic and forecast of a third wave, said Tarun Chugh, Managing Director and CEO, Bajaj Allianz Life Insurance. In an interview with BusinessLine, he said that while the industry is expecting higher claims, it is not much of a concern. Excerpts:

What is your outlook for this year?

It is uncertain at this point of time. Normally, when we start the first quarter, we are clear about the strategy, but it is an uncertain time this year given how things have panned out in May. It is very difficult to forecast anything. This year, we are going more with scenario planning and not a forecast of the year as we don’t know when this wave will end and then there is a forecast of a third wave. The only thing we are certain about is that the usage of digital will keep increasing and we expect customers to still get life insurance in their portfolio because of the desire to cover risks.

Are high mortality claims an issue for the life insurance industry?

In respect to Covid claims, Bajaj Allianz Life has settled over 1,300 claims amounting to more than ₹74 crore. We are sensing that there will be higher mortality and impact on some claims. But last year too, we didn’t get the claims very early. It takes families some time to recover. But it is not a concern for the industry. All companies are comfortably placed in reserves. This year’s number will take a hit but nothing beyond that.

What is your strategy for the year?

Our first focus area is employee safety. We will be able to launch an employee vaccination programme soon. We are also focussing on growing our digital assets. We are also focussing on keeping our branches open and about 80 per cent of our branches are still open but with very limited staff.

How Bajaj Allianz Life’s agency channel revved up to face pandemic woes

What are the products that are seeing demand?

Unlike last year, all products are in demand unlike this year. May has not been a great month due to the lockdown. However, the uptake of term and guaranteed products continues. This time, since markets are doing well, ULIPs are also popular. The Budget proposal has not impacted ULIPs too much. We have seen an uptick in ULIPs less than Rs 2.5 lakh and some dip in above Rs 2.5 lakh but not significant. There is just a three to four per cent shift. The number of customers buying ULIPs less than Rs 2.5 lakh has gone up.

Sales of ULIPs are likely to start picking up: Tarun Chugh

How have life insures made underwriting norms tougher post Covid?

It has been a tough year for claims and underwriting has become stricter. For example, we have added a Covid questionnaire. But if somebody goes for their medicals and submits documents properly and fills up the Covid questionnaire, there is not so much of an issue. For people who have had Covid, we tell them to wait for 90 days and then apply for life insurance.

Is another round of hike in term insurance rates expected?

In the last 15 to 20 year, rates for term insurance have come down significantly. The industry had hit the bottom in terms of pricing and a correction was due and Covid became the right time for the price hike. I won’t be surprised if there is a slight price hike now as well but we will have to wait and watch. The increase will vary from insurer to insurer.

Are you launching any new products?

We recently launched our pension plan and that has done very well, particularly as in pensions, we don’t need to get any medicals done and the age group of above 45 has a lot more money. This has surprised us a lot in its uptake and about 12 per cent to 13 per cent of our entire business is coming from pensions.

Any plans to use the higher foreign direct investment cap for the insurance sector?

It is more of a shareholder matter and there has not been any move in that direction. We are fully capitalised, we have the highest amount of capital and reserves. There is no requirement of money.

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Kotak announces pandemic benevolent policy for its 73,000 employees, BFSI News, ET BFSI

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Kotak Mahindra Group (Kotak) has announced a Pandemic Benevolent Policy for its ~73,000 employees. Under this policy, family members/nominee of deceased employees from 1st April, 2020 and subsequent cases up to 31st March, 2022 will receive full monthly fixed salary (Cost to Company) for two years beginning June 2021.

The financial services conglomerate said the policy is applicable to families/nominee of all deceased employees irrespective of the cause of death – whether pertaining to Covid-19 or any other cause not related to the Covid-19 pandemic. They will also be eligible for annual bonus and year-end bonus for FY2020-21 and additional Kotak’s Mediclaim insurance will cover the spouse & minor children of the deceased employee for FY2021-22.

The firm said in a release, “To help and support employees across the country in their fight against the pandemic, Kotak has put in place a series of emergency measures including tie-ups for medical emergency response services, isolation facilities, telemedicine services, financial assistance for medical expenses as well as the formation of internal volunteer teams across the country to assist employees and their families with critical resources. Kotak is also striving to vaccinate all Kotakites and family members quickly, to win the fight against the virus and make each Kotakite safer and healthier.”

Kotak Mahindra Group (Group) offers a wide range of financial services from commercial banking, to stock broking, mutual funds, life and general insurance and investment banking.



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RBI keeps rates unchanged to support growth

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The Monetary Policy Committee of the Reserve Bank of India has decided to maintain status quo on key policy rates.

“The MPC took stock of the evolving macroeconomic and financial conditions and the impact of the second wave of Covid on the economy. Based on its assessment, the MPC voted unanimously to maintain the status quo on repo rates and maintain an accommodative stance for as long as possible to revive growth,” said RBI Governor Shaktikanta Das on Friday after the meeting of the MPC.

Also read: Monetary policy must remain accommodative

The policy repo rate remains unchanged at 4 per cent while the reverse repo rate is at 3.35 per cent.

The move comes amidst expectations of slowing growth after the second surge of the Covid-19 pandemic and local level lockdowns that have impacted economic activity. However, inflationary risks persist.

 

The RBI had kept key interest rates unchanged at the last MPC meeting held in April.

The RBI, in its Annual Report 2020-21, had also said that “the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.”

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RBI’s MPC begins deliberations amidst hopes of status quo in policy rate

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The Reserve Bank of India’s rate-setting panel, Monetary Policy Committee (MPC), began its three-day deliberations on Wednesday amid expectations of status quo on the benchmark rate, mainly on account of uncertainty over the impact of the second wave of the Covid-19 pandemic.

Moreover, fears of firming inflation may also refrain the MPC from tinkering with the interest rate. . The outcome of the bi-monthly monetary policy meeting will be announced on Friday.

Also read: How the RBI managed a large surplus transfer to the Centre in a difficult year

The RBI had kept key interest rates unchanged at the last MPC meeting held in April. The key lending rate, the repo rate, was kept at 4 per cent and the reverse repo rate or the central bank’s borrowing rate at 3.35 per cent.

M Govinda Rao, Chief Economic Advisor, Brickwork Ratings, said the better-than-expected GDP numbers provide the much-needed comfort to the MPC on the growth outlook.

However, with the imposition of partial lockdown-like restrictions to contain the virus spread in several parts of the country, the downside risk on growth recovery has intensified, he said.

“Hence, the RBI is likely to continue with its accommodative monetary policy stance. Considering the risk of inflation emanating from the rising commodity prices and input costs, Brickwork Ratings expects the RBI MPC to adopt a cautious approach and hold the repo rate at 4 per cent,” he noted.

Dhruv Agarwala, Group CEO, Housing.com, Makaan.com and PropTiger.com believes the RBI can maintain its accommodative stance in light of the economic impact of the second wave of Covid-19, without endangering its key goal of keeping inflation under control.

Reviving growth has become an important objective due to the economic damage caused by the recent lockdowns, he said, and added the RBI should also consider providing more liquidity to the National Housing Bank to enable the stability of housing finance companies, which in turn will allow the real estate sector to expand.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank was of the view that in the current environment, the choices before the Monetary Policy Committee may be limited.

“With the second phase of the pandemic impacting consumption and growth, the MPC will likely maintain status quo on policy rates, continue with an accommodative policy stance and ensure adequate liquidity in the system – all in an effort to stimulate growth. While it will keep one eye on inflation levels on the back of rising global commodity prices, it currently will focus on supporting economic growth,” Ekambaram said.

According to Sandeep Bagla, CEO of TRUST AMC, “It is expected to be a no change policy, with continued economy friendly soft interest rate bias.”

The RBI annual report released last week has already made it clear that “the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.” The Reserve Bank, the report added, would ensure that system-level liquidity remains comfortable during 2021-22 in alignment with the stance of monetary policy, and monetary transmission continues unimpeded while maintaining financial stability.

In the assessment of the RBI, the evolving CPI inflation trajectory is likely to be subjected to both upside and downside pressures. The food inflation path will critically depend on the temporal and spatial progress of the south-west monsoon in 2021.

The government has retained the inflation target at 4 per cent with the lower and the upper tolerance band of 2 per cent and 6 per cent, respectively, for the next five years (April 2021 – March 2026).

Also read: ‘RBI may keep repo rate unchanged’

Retail inflation, based on Consumer Price Index (CPI), slipped to a three-month low of 4.29 per cent in April mainly on account of easing of prices of kitchen items like vegetables and cereals. The RBI mainly factors in the CPI while arriving at its monetary policy.

As per the RBI annual report, supply-demand imbalances may continue to exert pressure on food items like pulses and edible oils, while prices of cereals may soften with bumper foodgrains production in 2020-21.

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