RBI turns pragmatic in a welcome move
Unlike the previous occassions, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to honor the market consensus and held the policy rates unchanged. However, honoring the consensus was limited to not changing the policy repo rates; otherwise it announced a number of policy measures that were not expected by the market and hence could be counted as positive surprise.
· The MPC kept the Repo Rate (5.15%), Reverse Repo Rate (4.9%) and Marginal Standing facility Rate (5.4%) unchanged.
· GDP growth for FY21 is projected at 6%, howver the recovery is expected to be back ended. Accordingly, the growth is expected to remain in the range of 5.5-6.0% in H1FY21, before recovering to 6.2% in Q3FY21.
· The target consumer price index (CPI) is maintained at 4% +/- 2% band. However, the CPI inflation projection has been revised upwards to 6.5% for Q4FY20; 5.0 to 5.4% for 1HFY21 and 3.2% for 3QFY21 with risks broadly balanced.
The policy statement makes many departures and signals a paradigm shift in the thought process at RBI. There is a clear hint in the policy statement that pragmatism may finally be making inroads at RBI. The decision makers appear inspired to experiment with innovative policy tools rather than sticking with traditional methods and thought process. For example consider the following measures:
· For the first time MPC included the term “as long as it is necessary” in regard to its accommodative monetary policy stance. This shall comfort the markets as it lends a fair degree of predictability to the policy stance. The governor categorically stated in the post policy press interaction that the next policy move will be a cut, the timing of which will be determined by the inflation trajectory.
· Instead of cutting Repo Rate, the RBI instituted an mechanism whereby the short and mid-term bond yields may converge to Repo Rate of 5.15%, effectively meaning more than 50bps rate cut at the shorter end of maturities. To achieve this end, RBI has announced Long Term Repo Operations (LTROs) of 1yr and 3yr at the repo rate of upto Rs1trn, which effectively means that Rs1trn would be available to banks for 1yr and 3yr at 5.15% instead of 5.8 to 6.12% at present.
· Henceforth, a 14-day term repo/reverse repo operation at a variable rate conducted to coincide with the cash reserve ratio (CRR) maintenance cycle would be the main liquidity management tool for managing frictional liquidity requirements.
· For the first time RBI provided targeted credit stimulus without actually compromising on overall prudential norms. Traditionally the sector specific easing was done by relaxing risk weights. This time it has been decided that the banks will exempted from maintaining CRR on the incremental credit provided by the banks during February-July 2020 period to retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs).
· For the benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated January 1, 2019 as also the MSME entities which have become stressed thereafter, it has been decided to extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1, 2020.The restructuring under the scheme has to be implemented latest by December 31, 2020.
· For the benefit of real estate projects that get stuck due to reasons beyond control of the developer (e.g., due to delay in clearances, courts injunctions etc.) the RBI has decided to allow extension of date of commencement of commercial operations of project loans for commercial real estate. (Loan for commercial real estate here means loan for real estate being developed for selling and not self use). This essentially means that the projects remaining uncompleted for reasons beyond the control of the developers shall remain standard asset till the time they are completed. This is one of the most pragmatic policy measure taken in recent years.
Read the policy documents here