Reserve Bank of India Governor Shaktikant Das in a meeting informed that on the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 percent.
Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 percent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 percent.
The Reserve Bank of India (RBI) is perhaps the only central bank in the world to have set up a special quarantine facility with its officers, staff and service providers, numbering about 200, for critical operations to ensure business continuity in banking and financial market operations and payment systems Governor said.
The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target going forward. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth.
Assessment
• The global manufacturing purchasing managers’ index (PMI) and the global services PMI rose to 50.3 and 50.5, respectively in July, moving back to the expansion zone.
• Global Economy- Global financial markets have rebounded since end-March 2020 with intermittent pauses, shrugging off the volatility and sharp correction recorded in Q1:2020. Portfolio flows returned to EMEs in Q2 after a massive reversal, though there was moderation in July from the previous month’s level.
• Domestic Economy- On the domestic front, economic activity had started to recover from the lows of April-May following the uneven re-opening of some parts of the country in June; however, surges of fresh infections have forced re-clamping of lockdowns in several cities and states. Consequently, several high-frequency indicators have leveled off.
• Headline CPI inflation, which was at 5.8 percent in March 2020, was placed at 6.1 percent in the provisional estimates for June 2020. Inflation pressures were evident across all sub-groups.
• For the year 2020-21 as a whole, real GDP growth is also estimated to be negative. Early containment of the COVID-19 pandemic may impart an upside to the outlook.
• Additional special liquidity facility of Rs 10,000 crore will be provided at the policy repo rate consisting of Rs 5,000 crore to the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies (HFCs), and Rs 5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity.
• A restructuring framework for MSMEs that were in default but ‘standard’ as on January 1, 2020 is already in place. The scheme has provided relief to a large number of MSMEs. With COVID-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support. Accordingly, it has been decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021.
• As per extant guidelines, loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 percent of the value of gold ornaments and jewellery. With a view to mitigating the impact of COVID-19 on households, it has been 11 decided to increase the permissible loan to value ratio (LTV) for such loans to 90 percent. This relaxation shall be available till March 31, 2021.
• As per RBI’s extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital, as compared to holding the same debt instrument through a Mutual Fund (MF)/Exchange Traded Fund (ETF). It has been decided to harmonise the differential treatment existing currently. This will result in substantial capital savings for banks and is expected to give a boost to the corporate bond market.
