The Monetary Policy Committee of the RBI kept policy rates unchanged in the last meeting of FY21, in line with consensus and our expectations. As such, the repo and reverse repo rates continue to remain at 4.00% and 3.35%, respectively. The committee drew comfort from –
Improving growth prospects as seen through the sequential improvement in high frequency indicators and the ongoing vaccination drive
The Dec-20 inflation print of 4.6% and a benign inflation outlook
In its forward guidance, the RBI emphasized to continue with the accommodative stance as long as necessary- at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
The accommodative stance as well as the decision to leave the rates unchanged was unanimous with a 6-0 vote.
Growth: The central bank projected FY22 GDP growth at 10.5%.
H1 FY22 GDP growth is expected in the range of 8.3% to 26.2%, revised upwards from its earlier projection of 6.5% to 21.9%
Q3 FY22 GDP growth expected at 6.0%, with risks broadly balanced
Inflation: Basis Q4 FY21 forecast provided by the committee, FY21 CPI inflation is expected at 6.3% in FY21 vis-à-vis the earlier expectation of 6.5%
H1 FY22 CPI inflation is expected in the range of 5.2-5.0% vis-à-vis its earlier expectation of 5.2- 4.6%
Q3 FY22 CPI inflation is projected at 4.3% with risks broadly balanced
Rationale for policy (in)action
The central bank projected FY22 GDP growth at 10.5% in the backdrop of improving consumer confidence and business expectations of manufacturing, services and infrastructure sector. It views the thrust given by the Union Budget FY22 on sectors like health and infrastructure to be growth inducing as it revolves around capacity creation. With the vaccination drive gaining pace and growth conditions still evolving, the RBI believes that monetary policy support remains critical.
The RBI drew comfort on inflation outlook due to bumper Kharif output, rising prospects of a good Rabi harvest, larger winter arrivals of key vegetables and softer egg and poultry demand on avian flu fears. However, the RBI cautioned against 1) the broad-based escalation in cost-push pressures in services and manufacturing prices due to increase in industrial raw material prices, including oil prices, and 2) increased pass-through to output prices as demand normalizes, and firms regain pricing power.
RBI also set out various liquidity, regulatory and supervisory measures to support the financial market and targeted sectors.
· On-tap TLTROs: It has now been proposed to provide funds from banks to NBFCs for incremental lending to select stressed sectors.
· CRR: It has been decided to gradually restore the CRR in two phases in a non-disruptive manner. Banks would now be required to maintain the CRR at 3.5% of Net Demand and Time Liabilities (NDTL) effective from March 27, 2021 and 4.0% of NDTL effective from May 22, 2021.
· MSF: MSF relaxation for banks (cumulatively up to 3% of NDTL) has been extended from March 31, 2021 to September 30, 2021.
Regulation and Supervision
· HTM: In order to provide certainty to the market participants in the context of the borrowing programme of the centre and states for FY22, it has now been decided to extend the dispensation of enhanced HTM of 22% up to March 31, 2023 to include securities acquired between April 1, 2021 and March 31, 2022. The HTM limits would be restored from 22% to 19.5% in a phased manner starting from the quarter ending June 30, 2023.
· MSME: In order to incentivize new credit flow to the micro, small, and medium enterprise (MSME) borrowers, SCB’s will be allowed to deduct credit disbursed to ‘New MSME borrowers’ from their Net Demand and Time Liabilities (NDTL) for calculation of the Cash Reserve Ratio (CRR). For the purpose of this exemption, ‘New MSME borrowers’ shall be defined as those MSME borrowers who have not availed any credit facilities from the banking system as on January 1, 2021. This exemption will be available only for exposures up to INR 25 lakh per borrower for credit extended up to the fortnight ending October 1, 2021 for a period of one year from the date of origination of the loan or the tenure of the loan, whichever is earlier.
· CCB: The implementation of last tranche of the capital conservation buffer (CCB) of 0.625% was scheduled to take effect from April 1, 2021. It has now been decided to defer the implementation of the last tranche of the CCB of 0.625% from April 1, 2021 to October 1, 2021.
· NSFR: As part of the regulatory measures taken in the wake of COVID-19, the implementation of Net Stable Funding Ratio (NSFR) by banks in India had been deferred to April 1, 2021. It has now been decided to defer the implementation of NSFR to October 1, 2021.
· It is proposed to review the regulatory framework for Non-Banking Financial Company – Micro Finance Institutions (NBFC-MFIs). Accordingly, the RBI will come out with a consultative document harmonizing the regulatory frameworks for various regulated lenders in the microfinance space including SCBs, small finance banks and NBFC-Investment and Credit Companies in Mar-21.
· It has been decided to set up an Expert Committee on Primary (Urban) Co-operative Banks (UCBs) involving all stakeholders in order to provide a medium-term road map to strengthen the sector, enable faster rehabilitation/resolution of UCBs, as well as to examine other critical aspects relating to these entities
· In order to deepen the financial markets in International Financial Services Centres (IFSCs) and provide an opportunity to resident individuals to diversify their portfolio, it has been decided to permit resident individuals to make remittances to IFSCs established in India under the Liberalised Remittance Scheme
Deepening Financial Markets
· To increase retail participation in government securities and to improve ease of access for retail investors, it has been decided to provide retail investors online access to the government securities market – both primary and secondary – along with the facility to open their gilt securities account (‘Retail Direct’) with the RBI
· Foreign portfolio investors (FPI) investment in defaulted corporate bonds will be exempted from the short-term limit and the minimum residual maturity requirement under the Medium Term Framework (MTF) for investment by FPIs in corporate bonds
The RBI has reiterated its resolve to continue policy support until growth picks up on a sustained basis. By drawing support from benign inflation outlook, growth inducing FY22 Union Budget, improving high frequency macro-economic indicators, and spread of vaccination, the RBI stayed pat on rates while reinforcing its commitment to accommodative monetary policy stance. Though the RBI did not allude to an OMO schedule for FY22 which disappointed the markets somewhat, other policy measures like extension of enhanced HTM limit of 22% until Mar-23 and provision for retail investors to access g-secs directly through the RBI are welcome steps to absorb g-sec supply pressure in FY22. In addition, the phased normalization of CRR, extension of liquidity dispensation via MSF, extension of On Tap TLTRO for the NBFCs, and incentives for banks to create fresh lending to MSMEs continues to highlight RBI’s objective to maintain financial stability and support credit expansion in stressed sectors. Meanwhile, deferment of the implementation of the last tranche of CCB and NSFR by banks from Apr-21 to Oct-21 will allow for incremental liquidity buffer with them.
Overall, the monetary policy statement clearly resonated with the Government’s resolve to support growth till – ‘the prospects of a sustained recovery are well secured’…’while creating conditions that result in a durable disinflation’. In our view we expect the RBI to stay on hold in FY22. If growth picks up on a durable basis in H2 FY22, a 25 bps rate hike cannot be ruled out.