RBI’S BI-MONTHLY MONETARY POLICY REVIEW ON 6TH AUGUST 2020 – Highlights & Key Takeaways

The Monetary Policy Committee met on 4th, 5th and 6th August for its second meeting of 2020-21, completing four years of its operation under the new monetary policy framework. The MPC sifted through domestic and global conditions and evaluated their unfolding impact on overall outlook for India and the world. At the end of its deliberations, the MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent and continue with the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward. The Marginal Standing Facility (MSF) rate and the Bank rate remain unchanged at 4.25 per cent. The reverse repo rate stands unchanged at 3.35 per cent.

The RBI Governor in his address on 6th August stated that 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. Other teams in the RBI have ensured availability of digital banking channels, ATMs, internet/ mobile banking, cyber security, redress of customer grievances, and carried out sustained campaigns about safe use of digital transactions through RBI Kehta Hai. The Governor said "Our teams have also provided logistical support, and engaged in analysis and research to back the conduct of financial and monetary policies. I am proud of all of them for their tireless commitment to public service. I would also like to applaud all employees of banks and other financial entities for ensuring uninterrupted operations in these trying times. Our gratitude also goes out to all COVID warriors – medical and health personnel, police and other law enforcement agencies, authorities at various levels and others."

Click on the following link for full video:Governor's address on Monetary Policy on 6th August 2020  &/or to read document click on the following link: Governor’s Statement – August 6, 2020

Highlights of Monetary Policy:

- RBI to maintain accommodative stance

- Reserve Bank of India keeps interest rates unchanged at bimonthly monetary policy review

- Reverse repo rate also remains unchanged at 3.35%.

- RBI keeps repo rate unchanged at 4%

-Marginal Standing Facility Rate and bank rate unchanged at 4.25%

- Priority sector lending status extended to start-ups.

- Loans against gold enhanced to 90% of the value from current 75% to mitigate Covid-19 impact on households

-With Covid-19 continuing to affect economy, stressed MSME borrowers to be eligible for restructuring of debt if their accounts were classified standard

- RBI allows lenders to provide window to restructure loans of corporate, individual borrowers to ease Covid-19 impact, says Governor Das

- Rs 10,000 cr additional liquidity facility to be provided by NHB, NABARD

- In India, economic activity had started to recover, but surges of fresh infections have forced fresh lockdowns, hence several high-frequency indicators have levelled off

- Real GDP growth to remain in negative zone in 1st half and in full fiscal. For the year 2020-21, real GDP growth is also estimated to be negative

- India’s economic growth to contract in first half of fiscal beginning April 2020

- Exports contracted for 4th successive month, though pace of contraction fell. Supply chain disruptions persist with implications on prices of food & non-food items; inflation pressures evident across segments

-Inflation stays high, says RBI governor Domestic food inflation has remain elevated across economies ever since the Coronavirus outbreak, but he said that agriculture sector prospects have improved with the good monsoons and rise in Kharif sowing area

-The merchandise exports contracted for fourth consecutive month though the pace of contraction has moderated,

- MPC is expected inflation to stay elevated in Q2FY21 but is of the view that is it likely to ease in H2 aided by favourable base effects

- Economic activity had started to recover, but surge in infection has forced imposition of lockdowns,

- Global economic activity has remained fragile; surge in Covid-19 cases has subdued early signs of revival, says RBI Governor

-To enhance safety of cheque payments, it has been decided to introduce a mechanism of Positive Pay for all cheques of value 50,000 and above. This will cover approximately 20 per cent and 80 per cent of total cheques by volume and value, respectively. Operational guidelines in this regard will be issued separately by RBI

RBI’s To-Do List In Fight Against Covid-19

  • To enhance liquidity support for financial markets
  • To further ease financial steps caused by Covid-19
  • To improve the flow of credit To deepen digital payment systems
  • To augment customer safety in cheque payments
  • To facilitate innovations across the financial sector

Key Takeaways from the MPC meet:

Relief for businesses and borrowers
- A window under the June 7 stressed asset resolution framework will be provided which will enable lenders to implement a resolution plan, without a change in ownership.
- RBI will also constitute a committee under KV Kamath on required financial parameters to be factored into resolution plan.
A lifeline for small and medium firms
- Stressed MSME borrowers will be eligible for restructuring their debt under the existing framework provided their accounts were standard as of March 1, 2020.
- This restructuring will have to be implemented by March 31, 2021
This will provide further relief to MSMEs as the pandemic continues to disrupt normal functioning and cash flows.

Borrow more against gold jewellery
- Loan-to-Value for loans sanctioned by banks against pledge of gold for non-agri purposes increased to 90% from 75%.
- Relaxation available till March 31, 2021.
This will allow households to borrow more against existing gold holding than before. Households will be able to get more funds by taking a loan and not be forced to sell it to get more liquidity.
More money for real estate
- National Housing Bank to get Rs 5,000 crore to shield the housing sector from liquidity disruption, augment the flow of finance.
- Nabard to get Rs 5,000 crore to ameliorate stress faced by small NBFCs and MFIs.

Flexibility for banks
- The Reserve Bank will introduce an optional facility to provide banks more flexibility/discretion to manage their day-end cash reserve ratio balances.
- Banks will now be able to set the amount that they want to keep as balance in their current account with RBI at the end of the day.
Other announcements
- An innovation hub will be set up in India.
- A mechanism of positive pay for all cheques above Rs 50,000 to be introduced.
- A scheme of offload retail payments using cards and mobile devices and a system of online dispute resolution mechanism or digital payments will also be introduced.

Experts view on today's Monetary Policy:

  • Unmesh Kulkarni, Managing Director and Senior Advisor, Julius Baer India: With the start of Covid-19, RBI’s stance/priority had clearly changed from containment of inflation to addressing the stress in the economy and tackling growth-related challenges. In today’s policy, RBI MPC reiterated its commitment to address growth challenges of the economy (especially second-wave effects of Covid-19), by maintaining an accommodative stance for as long as necessary. This implies that RBI could be looking at an extended period of low rates.

    The announcement to harmonize the capital charge (for market risk) treatment of investment by banks in Debt Mutual Funds / ETFs and direct debt instruments, augurs well for the bond market, as there could be higher participation by banks in the bond markets over a period of time.

  •  

    "MPCs caution on uncertainty on inflation trajectory suggests that chances of further easing will henceforth remain a function clearly of the evolution of supply-side shocks. We see next few readings still elevated near 6 percent and hence we do not see any rate easing in at least the October meeting. On a positive note the other regulatory and development measures announced today will go a long way in ensuring financial stability," Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank said.

    The measures taken by the RBI given the six-month moratorium period due to COVID-19 crisis are positive for banks as there could be a one-time restructuring of loans and for that, the committee will be formed under veteran banker KV Kamath, while an increase in loan to value (LTV) for gold loans is also a significant step by RBI, experts feel.

    "More importantly, the RBI Governor addressed liquidity concerns in COVID crisis for housing, MSMEs, the flow of credit in corporate bond markets and facilitating improved platform and system for banks. The policy will be seen as a positive for banking sector since no extension of moratorium, one-time restructuring allowed with strict conditions, a veteran banker in Mr KV Kamath to lead the expert committee and allowing secured loans through gold as collateral with higher LTVs," Ambani said.

    For detail read please click here: RBI policy good for banks; one-time loan restructuring & increase in LTV for gold loans strong steps: Experts

    Please read the complete Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee (MPC) August 4 to 6, 2020 by clicking on the following link:Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee (MPC) August 4 to 6, 2020

Source: rbi.org.in, Hindustan times, facelesscompliance.com, Economic Times,Money Control

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