To support a faster economic recovery amid the surge in Covid-19 cases, the Reserve Bank of India (RBI) retained its key short-term lending rates along with the growth-oriented accommodative stance during the first monetary policy review of FY21-22. While setting up a committee to suggest measures to tap potential of asset reconstruction companies (ARCs), RBI has also decided to launch a financial inclusion index (FI Index) based on multiple parameters.
RBI has also decided to extend its centralised payment systems (CPSs)—real time gross settlement (RTGS) and national electronic funds transfer (NEFT) to non-bank payment system operators like prepaid payment instrument (PPI) issuers, card networks, white label ATM operators and trade receivables discounting system (TReDS) platforms.
The monetary policy committee (MPC) of the central bank voted to maintain the repo rate, or short-term lending rate, for commercial banks, at 4%. Likewise, the reverse repo rate was kept unchanged at 3.35%, and the marginal standing facility (MSF) rate and the 'Bank Rate' at 4.25%.
Shaktikanta Das, governor of RBI, says, "The MPC voted unanimously to leave the policy repo rate unchanged at 4%. It also unanimously decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward."
According to Mr Das, juxtaposition of high frequency lead and coincident indicators reveals that economic activity is normalising despite the surge in infections. "Rural demand remains buoyant and record agriculture production in 2020-21 bodes well for its resilience. Urban demand has gained traction and should get a fillip with the ongoing vaccination drive," he says.
However, the RBI governor says, the recent surge in COVID-19 infections, adds uncertainty to the domestic growth outlook amidst tightening of restrictions by some state governments. In India, he says, "we are now better prepared to meet the challenges posed by this resurgence in infections. Fiscal and monetary authorities stand ready to act in a coordinated manner to limit its spillovers to the economy at large and contain its fallout on the ongoing recovery. There is concern around rising cases of infections but as Martin Luther King Jr had said and I quote: 'We must accept finite disappointment, but never lose infinite hope'."
RBI decided to continue to provide liquidity facility worth Rs50,000 crore for all India financial institutions (AIFIs). Accordingly, liquidity support of Rs50,000 crore for fresh lending during FY2021-22 will be provided to AIFIs, including Rs25,000 crore to National Bank for Agriculture & Rural Development (NABARD); Rs10,000 crore to National Housing Bank (NHB); and Rs15,000 crore to Small Industries Development Bank of India (SIDBI).
With a view to furthering financial inclusion and to expand the ability of payments banks to cater to the growing needs of their customers, the central bank decided to increase current limit on maximum end of day balance to Rs2 lakh from Rs1 lakh per individual customer.
According to RBI, asset reconstruction companies (ARCs) play an important role in the resolution of stressed assets. "Their potential, however, is yet to be fully realised. It is, therefore, proposed to constitute a committee to undertake a comprehensive review of the working of ARCs and recommend measures to enable these entities to meet the growing requirements of the financial sector," it says.
Financial inclusion has been a thrust area for the government, RBI and other regulators, with significant progress made over the years, Mr Das, the governor says, adding, "To measure the extent of financial inclusion in the country, the Reserve Bank proposes to construct and publish a FI Index based on multiple parameters. This will be published in July every year for the financial year ending previous March."
At present, membership to RBI's CPSs is limited to banks with a few exceptions. To minimise settlement risk in the financial system and enhance the reach of digital financial services to all user segments, the central bank has decided to non-bank payment system operators to take direct membership in CPSs.
Earlier in October 2018, the RBI had issued guidelines for adoption of interoperability on a voluntary basis for full-know-your-customer (KYC) PPIs. "As the migration towards interoperability has not been significant, it is now proposed to make interoperability mandatory for full-KYC PPIs and for all payment acceptance infrastructure. To incentivise the migration of PPIs to full-KYC, it is proposed to increase the current limit on outstanding balance in such PPIs to Rs2 lakh from Rs1 lakh," the RBI says.
Further, the central bank decided to allow cash withdrawal from full-KYC (know your customer) PPIs issued by non-banks.
While headline inflation at 5.0% in February 2021 remains within the tolerance band, RBI feels some underlying constituents are testing the upper tolerance level.
Going forward, it sees the food inflation trajectory will critically depend on the temporal and spatial progress of the south-west monsoon in its 2021 season. "Second, some respite from the incidence of domestic taxes on petroleum products through coordinated action by the centre and states could provide relief on top of the recent easing of international crude prices. Third, a combination of high international commodity prices and logistics costs may push up input price pressures across manufacturing and services. Taking into consideration all these factors, the projection for CPI inflation has been revised to 5.0% in fourth quarter (Q4) of FY20-21; 5.2% in Q1 of FY21-22; 5.2% in Q2; 4.4% in Q3; and 5.1% in Q4, with risks broadly balanced," the governor says.
The central bank also decided to extend by six months, the targeted long-term repo operation (TLTRO) on tap scheme to increase focus of liquidity measures on revival of activity in specific sectors. The TLTRO on tap scheme announced on 9 October 2020 will remain active till 30 September 2021.
"The speed and collective endeavour with which the world mobilised scientific energies to develop vaccines, and pandemic-related protocols, that have now become a way of life, give us hope and confidence that we will sail through this renewed second/third surge. Localised spurts in rates of infections will hopefully ebb with the COVID-19 vaccination drives. I truly believe in the indomitable spirit of the human race which confronted the trial by virus during 2020 with resilience and fortitude and the will to survive. Let 2021 be the harbinger of a new economic era for India," the RBI governor concludes.