Reserve Bank of India leaves rates on hold but boosts liquidity

The Reserve Bank of India decided to leave its key policy interest rates – the repo rate and reverse repo rate - unchanged at 4.00% and 3.35% respectively. There was no change to the banks’ cash reserve ratio either, currently 3.00%.

The stable policy rates were in line with the unanimous market consensus. It was also a unanimous vote by all six members of the Monetary Policy Committee -- a revamped MPC after three new external members joined this week.

The MPC also decided to continue with the accommodative policy stance for as long as necessary.

Governor Shaktikanta Das unveiled additional liquidity and regulatory easing measures to facilitate the economic recovery from this crisis. Among the main announcements here are:

• Conduct INR 1 trillion of on-tap targeted long-term repo operations (TLTRO) with tenors up to three years at a floating rate linked to the repo rate. Banks are required to deploy funds obtained from this window in key sectors (with both backward and forward linkages) either by lending to companies in such sectors or investing in their bonds, commercial papers or non-convertible debentures.

• Extension of enhanced 22% limit on banks investment in SLR securities held to maturity until March 2022. The limit was increased from 19.5% of net demand and time liabilities (NDTL) in September for securities obtained from then until March 2021.

• Conduct open market operations in State Development Loans (SDLs) as a special case during the current financial year.

• Higher credit flow to the retail sector via an increase in banks’ exposure to retail lending from INR 50 million to 75 million per borrower.

• Enhancement of scheme of “Co-lending” by banks and certain non-bank finance companies (NBFCs) for priority sectors to include all NBFC and housing finance companies.

• Efficient payments system with round-the-clock availability of the real-time gross settlement (RTGS) system for high-value transactions.

A typical focus in the RBI policy statement is the central bank’s forecast of GDP growth and CPI inflation. You can find more details of that here.

The RBI sees the economy shrinking by 9.5% in the current financial year, FY2020-21 (April-March), with the balance of risk tipped on the downside. The Covid-19 lockdown dented GDP by 24% year-on-year in the April-June quarter. The central bank expects another 9.8% and 5.6% GDP fall in the subsequent two quarters and a 0.5% rise in the final quarter of the year.

Inflation has been running above the RBI’s 2-6% monetary policy target for the year so far – 6.6% year-to-date. The central bank forecasts it returning to the target zone in the second half of the year with these hopes pinned on the restoration of supply chains affected by the Covid-19 lockdown.