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RBI MPC Decision on Policy Rates

Updated: Aug 17, 2020


As the Monetary policy committee (MPC) met under unprecedented circumstances, they had a tough job to do, to manage an already precarious economy and protect it from emerging shocks. As Inflation was creeping upwards, with the country already in recession, the MPC had a number of tough decisions to make, some of which are listed below:


Repo rate and reverse repo rate

The MPC kept repo rates unchanged at 4 percent, reverse repo rate remains unchanged at 3.35 percent thus maintaining an accommodative stance. MPC voted unanimously in favor of the status quo. RBI said that the space for further monetary policy action is available but it is advisable to be judicious.


Loan restructuring for MSME

Recognizing the need for continued support to MSMEs’ meaningful restructuring, RBI decided that in respect of MSME borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may restructure the debt under the existing framework, provided the borrower’s account was classified as standard with the lender as on March 1, 2020. This restructuring shall be implemented by March 31, 2021.


Inflation

"Domestic food inflation has remained elevated across economies ever since the coronavirus outbreak," said RBI governor Shaktikanta Das. However, the agriculture sector prospects have improved with good monsoons and rise in Kharif sowing area. MPC predicted retail inflation to remain elevated in Q2. However, it suggested that a more favourable food inflation outlook might emerge on good farm produce.


Somber growth outlook

RBI said that the real GDP growth of the country may remain in a negative zone in the first half and overall financial year of 2021. The output of core industries in June reduced for the fourth successive month though with considerable moderation. The Reserve Bank’s business assessment index (BAI) for Q1FY21 hit its lowest mark in the survey’s history. The manufacturing PMI remained in contraction, declining further to 46.0 in July from 47.2 in the preceding month. However, high-frequency indicators of service sector activity for May-June indicate signs of a modest resumption of economic activity, especially in rural areas, although at a slower pace than a year ago. RBI Governor Shaktikanta Das announced Rs 10,000 crore special liquidity facility for NABARD, NH.


Resolution framework for COVID-19-related stress

The RBI announced providing a window under the Prudential Framework to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without a change in ownership and personal loans while classifying such exposures as Standard, subject to specified conditions. The RBI suggested that such conditions be considered necessary to ensure that the facility of this resolution window is available only to the COVID-19 related stressed assets. Besides that, the crucial aspect of maintaining financial stability has also been suitably factored in. The framework shall not be available for exposures to financial sector entities as well as central and state governments, local government bodies (e.g. municipal corporations), and any corporate body established by an Act of Parliament or State Legislature, said RBI. Only those borrower accounts shall be eligible for resolution that were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020. The accounts should continue to remain standard till the date of invocation. Lenders shall have to keep additional provisions of 10 percent on the post-resolution debt.

Increase in permissible loans against gold Ornaments and jewelry

RBI allowed an increment in the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewelry for non-agricultural purposes from 75 percent to 90 percent. This relaxation shall be available until March 31, 2021.

Additional liquidity facility for NHB, NABARD

RBI said it will provide an additional standing liquidity facility (ASLF) of Rs. 5,000 crore to NHB – over and above Rs 10,000 crore already provided – for supporting housing finance companies (HFCs). The facility will be for a period of one year and will be charged at the RBI’s repo rate. Moreover, RBI will provide an additional special liquidity facility (ASLF) of Rs 5,000 crore to NABARD at the RBI’s policy repo rate for refinancing NBFCMFIs and other smaller NBFCs to support agriculture and allied activities and the rural non-farm sector.

Creation of innovation hub

Areas such as cybersecurity, data analytics, delivery platforms, payments services, etc., remain at the forefront when we think of innovation in the financial sector. RBI will set up an Innovation Hub in India to promote innovation across the financial sector by leveraging technology and creating an environment that would facilitate and foster innovation. The Innovation Hub will act as a center for creating innovative and viable financial products and/or services to help achieve the wider objectives of deepening financial inclusion, efficient banking services, business continuity in times of emergency, strengthening consumer protection, etc. The Innovation Hub will also support and hand-hold cross-thinking spanning regulatory remits and national boundaries.

Online dispute resolution for digital payments

RBI underscored that as the number of digital transactions rises significantly, there is an associated increase in the number of disputes and grievances. The central bank may require Payment System Operators (PSOs) to introduce Online Dispute Resolution (ODR) Systems in a phased manner. "To begin with, authorized PSOs shall be required to implement ODR systems for failed transactions in their respective Payment Systems. Based on the experience gained, ODR arrangements will be extended to other types of disputes and grievances," RBI said.

Offline retail payments using cards and mobile devices

The RBI proposed to allow a pilot scheme for small value payments in offline mode with built-in features for safeguarding the interest of users, liability protection, etc. The central bank said the instructions in this regard will be issued shortly.

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