RBI monetary policy | Shaktikanta Das delivers on his promise to lend a hand to shore up economy

Shaktikanta Das_RBI_Reserve bank

The Reserve Bank of India (RBI) Governor Shaktikanta Das on February 5 unveiled a growth-focused monetary policy, once again assuring the market that the central bank would ensure adequate liquidity to shore up the economy and nudge banks to lend more to smaller firms.

The monetary policy committee (MPC) left unchanged the key lending repo rate—at which banks borrow from RBI—in an expected move. The policy stance, both in terms of monetary policy and liquidity management, will continue as "accommodative", reaffirming the willingness to support growth, Das said. Markets cheered the move.

The RBI has projected a GDP growth of 10.5 percent in FY22 in line with what the Economic Survey and the Budget predicted. Economists called the growth projection realistic.

But more than rate action, markets were awaiting announcements on the liquidity front and the central bank didn’t disappoint. Das announced a range of measures to ensure comfortable systemic liquidity amid record-high borrowing.

“The RBI will persevere with its paramount objective of reviving the economy,” Das said, announcing the monetary policy at the end of the two-day meeting.

Also read: RBI monetary policy | Retail investors can take direct exposure in G-Secs, says Shaktikanta Das

“Gross market borrowing of the Centre for 2021-22 is budgeted at Rs 12 lakh crore. As the government’s debt manager and banker, the Reserve Bank will ensure the orderly completion of the market borrowing programme in a non-disruptive manner,” the Governor said.

Top economists cheered the policy.

“They have ticked all the right boxes and made the right noises,” said DK Joshi, chief economist at rating agency Crisil. “The RBI has done as much as it could do to support growth and the large government borrowing. The measures announced give comfort to the markets,” said Joshi.

Also read: Growth coming back, says RBI governor: Key highlights from RBI MPC

Since March 2020, when the pandemic began, the monetary policy committee (MPC) has cut the repo rate by 115 basis points. Since February 2019, the rate cuts amount to 250 bps. One bps is one-hundredth of a percentage point. Banks have passed on the rate cuts to end borrowers subsequently. The central bank may wait to see the full transmission of the policy rates before acting further.

The RBI announced a slew of measures to support liquidity and credit growth to productive sectors. These include extending the TLTRO funding to NBFCs and extending the Marginal Standing Facility (MSF) by another six months.

Follow our LIVE coverage of the RBI MPC announcements here

The RBI also extended the dispensation of enhanced HTM of 22 percent 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 percent to 19.5 percent in a phased manner, starting from the quarter ending June 30, 2023.

“It is expected that banks will be able to plan their investments in SLR securities in an optimal manner with a clear glide path for restoration of HTM limits,” the RBI said.

Besides, the central bank announced measures to ensure liquidity flow to micro, small and medium companies and micro-finance institutions.

The RBI said banks would be allowed to deduct credit disbursed to “new MSME borrowers” from their net demand and time liabilities (NDTL) for the calculation of CRR.

“For the purpose of this exemption, new MSME borrowers’ would be those who have not availed any credit facilities from the banking system as on January 1, 2021,” the RBI said.

This exemption will be available for exposures up to Rs 25 lakh per borrower for credit extended up to the fortnight ending October 1, 2021.

Retailers get direct access to G-Secs

The central bank’s decision to allow retail participants have direct inline access to the government security market is significant. Till now, retailers had limited access to G-Secs through exchange platforms. Retail investors will now have online access to the government securities market—both primary and secondary—through the Reserve Bank, Das said.

“This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market. This is a major structural reform placing India among select few countries which have similar facilities,” he said.

The MPC’s growth-supportive policy stance is no surprise as more than once in the past, it has dropped enough hints to state its policy stance—reviving growth. That stance has continued.

Das has assured comfortable liquidity to markets. Bond markets are already spooked with the elevated borrowings that have accompanied a growth-focused Budget.

The government will borrow Rs 12.05 lakh crore from the market in 2021-22, lower than the Rs 12.80 lakh crore estimated for the current financial year.

According to the revised estimate, the gross borrowing for the financial year was raised to Rs 12.8 lakh crore as against the Budget estimates of Rs 7.8 lakh crore, registering an increase of 64 percent.

The RBI has derived comfort from the softening inflation to retain the accommodative stance. India's Consumer Price Index (CPI), which measures the country's retail inflation, eased to 4.59 percent in December versus 6.93 percent in November.

The Consumer Food Price Index (CFPI), or the inflation in the food basket, eased to 3.41 percent in December, down from 9.50 percent in November.

Economic growth is picking up, albeit, slowly. The latest PMI data signals some optimism in the recent months. Bank lending has picked up slowly and restructuring figures shows companies are showing better-than-expected recovery. But the overall growth scenario remains fragile and economists have warned that a sudden withdrawal of liquidity could hurt growth and spook financial markets.

On February 5, the RBI said the cut effected in CRR  will be restored in two phases in a non-disruptive manner to 3.5 percent from March 27, 2021 and 4 percent from May 22, 2021. “As mentioned earlier, the CRR normalisation opens up space for variety of market operations of the RBI to inject additional liquidity,” Das said.