The Reserve Bank of India (RBI) at its first bi-monthly monetary policy committee (MPC) review in 2021 decided to keep the key interest rates unchanged, sending a strong signal that it would do all it takes to protect economic growth.

In a statement after the MPC review, RBI Governor Shaktikanta Das said that the outlook on growth had improved significantly, with positive growth impulses becoming more broad-based, and the roll-out of the vaccination programme in the country auguring well for the end of the pandemic. “Given that inflation has returned within the tolerance band, the MPC judged that the need of the hour is to continue to support growth, assuage the impact of Covid-19, and return the economy to a higher growth trajectory,” he said.

On its part, the MPC unanimously decided to keep the repo rate—the rate at which the central bank lends short-term funds to banks—unchanged at 4% and the reverse repo rate at 3.35%. It also 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—to revive growth on a durable basis and mitigate the impact of Covid-19, while ensuring that inflation remains within the target going forward.

Das took cognisance of the latest Union Budget which has provided strong impetus for revival of sectors such as health and well-being, infrastructure, innovation, and research. “This will have a cascading multiplier effect going forward, particularly in improving the investment climate and reinvigorating domestic demand, income, and employment,” Das said. “The projected increase in capital expenditure augurs well for capacity creation and crowding in private investment, thereby improving the prospects for growth and building credibility around the quality of expenditure.”

Given the recent set of policy measures deployed by the government as well as the central bank, inflation has been a lingering worry for the economy. However, after breaching the upper tolerance threshold continuously since June 2020, consumer price inflation (CPI) moved below 6% in December for the first time in the post-lockdown period, supported by favourable base effects and a sharp fall in key vegetable prices, the latter accounting for around 90% of the decline in headline inflation during November and December.

Accordingly, the MPC has revised its projection for CPI to 5.2% for Q4FY21, 5.2%-5.0% in H1FY22, and 4.3% for Q3FY22, with risks broadly balanced. “The MPC also cautioned about the rise in inflation that could arise from cost-push pressures and rising petroleum prices,” said Deepthi Mathew, economist at Geojit Financial Services.

On the growth front, taking various factors into consideration, the MPC has pegged real GDP growth projection at 10.5% in FY22—between 26.2% to 8.3% in H1 and 6.0% in Q3. But that would not fructify unless the RBI—the government’s debt manager and banker—creates a conducive environment of ample liquidity. This is because the Budget has pegged the centre’s gross market borrowings for FY22 at around ₹12 lakh crore.

This calls for sound medium-term liquidity management measures and the RBI has taken many steps in that direction.

The RBI governor proposed that NBFCs will be allowed to borrow from banks, under the Targeted Long Term Repo Operations (TLTRO) on tap scheme, for incremental lending to the specified stressed sectors.

There was also good news for banks. Since March 27 last year, the RBI had allowed banks to avail funds under marginal standing facility (MSF) by dipping into the Statutory Liquidity Ratio (SLR) up to an additional 1% of net demand and time liabilities (NDTL)— cumulatively up to 3% of NDTL. Das announced that this facility will now be available up to September 30, 2021, to provide comfort to banks on their liquidity requirements. “This dispensation provides increased access to funds to the extent of ₹1.53 lakh crore,” the RBI governor said.

Another important measure was extending banks’ enhanced Held to Maturity (HTM) of 22% up to March 31, 2023 to include securities acquired between April 1, 2021 and March 31, 2022. This was done to provide certainty to the market participants in the context of the borrowing programme of the centre and states for FY22.

On September 1, 2020, the RBI had increased the limits under HTM category to 22% of NDTL, up to March 31, 2022, in respect of SLR eligible securities acquired on or after September 1, 2020, up to March 31, 2021. The RBI governor said that the HTM limits would be restored from 22% to 19.5% in a phased manner starting from the quarter ending June 30, 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,” he added.

However, some debt market participants seemed worried. “Lack of specific market intervention measures to ensure smooth absorption of the enhanced market borrowings remains the key disappointment from the fixed income market perspective,” said Rajeev Radhakrishnan, CIO–fixed income at SBI Mutual Fund.

The masterstroke of the RBI was its proposal to provide retail investors with online access to the government securities (G-Secs) market—both primary and secondary—directly through the Reserve Bank (‘Retail Direct’) platform. This is a major structural reform placing India among select few countries which have similar facilities. “This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market,” the governor said.

According to Kumaresh Ramakrishnan, CIO–fixed income at PGIM India Mutual Fund, the RBI’s steps allowing retail investors to open direct accounts with the RBI to invest in G-Secs should also help in improving and creating sticky demand over time.

In the fight against Covid-19 disruptions, the RBI had reduced the cash reserve ratio (CRR) requirement of all banks by 100 basis points (1%), from 4% to 3.0%, for a period of one year ending on March 26, 2021. Das said that the MPC decided to gradually restore the CRR in two phases in a non-disruptive manner to 3.5% effective from March 27, 2021 and 4.0% effective from May 22, 2021. “Systemic liquidity would, however, continue to remain comfortable over the ensuing year,” he assured.

“The CRR normalisation opens up space for a variety of market operations to inject additional liquidity,” the RBII governor said. “The underlying theme of our endeavour in these areas would be to flexibly use all instruments in our arsenal appropriately without jeopardising financial stability.” However, Mathew of Geojit Financial Services said that though the RBI governor assured of more liquidity measures, an increase in the CRR can be seen as the first step towards the normalisation of monetary policy.

According to Aurodeep Nandi, India economist at Nomura, the art of managing ‘RBI LiquExit’ required words as much as action. “On both, the RBI largely lived up to expectations, and in some aspects exceeded it,” said Nandi. “The RBI clearly communicated that it doesn’t intend to yank away the liquidity carpet in a way that topples the vases of growth recovery and fiscal financing resting on it.”

While concluding his MPC statement, the RBI governor said that, going forward, the Indian economy is poised to move in only one direction and that is upwards. “It is our strong conviction, backed by forecasts, that in 2021-22, we would undo the damage that Covid-19 has inflicted on the economy,” said Das. Clearly, the RBI has chosen to be the guardian of growth.

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