RBI Monitory Policy – October 09

(RBI) on October 9, maintained a status quo on key lending rates and kept its policy stance ‘accommodative’.
The Monetary Policy Committee (MPC) of the RBI took a unanimous decision to keep the repo rate unchanged at 4 percent and reverse the repo rate at 3.35 percent.
“MPC has voted unanimously to leave the repo rate unchanged at 4 percent, a stance also kept ‘accommodative’ for as long as needed, to support growth,” said RBI Governor Shaktikanta Das.

Here are the top 6 highlights of RBI MPC:
Growth outlook: RBI underscored while COVID-19 remains a threat, the economy is showing signs of improvement.
RBI said that the modest recovery in various high-frequency indicators in September 2020 could strengthen further in the second half of 2020-21 with progressive unlocking of economic activity.
“The mood is shifting from fear and despair to hope. Inflation will ease closer to target by Q4FY21. GDP growth may turn positive by Q4. India is likely to see speedy recovery with variations across sectors. Agriculture, consumer goods, power, and pharma sectors to see quicker recovery,” said Governor Das.

Das also added that the rural economy looks resilient. Foodgrain production set to cross another record in FY21 and migrant labour is return to work in urban areas. Online commerce is booming, people are getting back to offices. Forward-looking biz expectations are optimistic.
RBI sees FY21 GDP contracting by 9.5 percent. PMI for September rose to 56.9; the highest since January 2012.
Inflation projection: The RBI said inflation will remain elevated in the September print, but ease gradually towards the target over Q3 and Q4.
“Our analysis suggests that supply disruptions and associated margins/mark-ups are the major factors driving up inflation. As supply chains are restored, these wedges should dissipate,” Das said.
Meanwhile, aggregate demand remains subdued and there is evidence of considerable resource slack.
Liquidity measures: RBI said the focus of liquidity measures by the RBI will now include the revival of activity in specific sectors that have both backward and forward linkages, and multiplier effects on growth.
The central bank will conduct special and outright bond purchases and announced on-tap TLTRO for Rs 1 lakh crore at 4 percent till March 2021. Besides, RBI will conduct OMO worth Rs 20,000 crore next week.
The RBI assured that the borrowing programme of the centre and states for the rest of 2020-21 will be completed in a non-disruptive manner without compromising on price and financial stability.
“The limit for Ways and Means Advances (WMA) for the centre has been kept higher at Rs 1.25 lakh crore compared to Rs 35,000 crore in the second half of the previous year. Similarly, the 60 percent increase in WMA limit for states in the first half of 2020-21 has been extended for a further period of 6 months till March 31, 2021,” Das said.
Additional measures: Against this backdrop and to provide impetus towards reviving the economy, RBI announced certain additional measures.
As per RBI, these measures are intended to (i) enhance liquidity support for financial markets; (ii) regulatory support to improve the flow of credit to specific sectors within the ambit of the norms for credit discipline; (iii) provide a boost to exports; and (iv) deepen financial inclusion and facilitate ease of doing business by upgrading payment system services.
SLR HTM limit extended: RBI extended the dispensation of the enhanced HTM (Held to Maturity) limit of 22 percent up to March 31, 2022, for securities acquired between September 1, 2020, and March 31, 2021.
It is expected that banks will be able to plan their investments in SLR securities in an optimal manner, RBI said.
On September 1, 2020, the RBI increased the investments permitted to be classified as HTM from 19.5 percent to 22 percent of NDTL in respect of SLR securities acquired on or after September 1, 2020, up to March 31, 2021.
Review of the Co-origination Model: In 2018, the RBI put in place a framework for the co-origination of loans by banks and a category of Non-Banking Financial Companies (NBFCs) for lending to the priority sector, subject to certain conditions.
Based on the feedback received from stakeholders, it has been decided to extend the scheme to all NBFCs, including HFCs, in respect of all eligible priority sector loans, and allow greater operational flexibility to the lending institutions.
“This ‘Co-Lending Model’ is expected to leverage the comparative advantages of banks and NBFCs in a collaborative effort, and improve the flow of credit to the unserved and underserved sectors of the economy,” RBI said.

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