RBI’s Bi-Monthly Monetary Policy Review 4th June 2021- Highlights and Key Takeaways:

Reserve Bank of India (RBI) today announced its bi-monthly monetary policy review as RBI Governor Shaktikanta Das read out Monetary Policy statement on Friday 4th June 2021. Friday’s policy statement came after RBI’s Monetary Policy Committee (MPC) started three-day deliberations on June 2. The meeting lasted for three days, between June 2 and 4, 2021. Mr Shaktikanta Das headed the panel with other members: Dr Shashanka Bhide, Dr Ashima Goyal, Prof. Jayanth R. Varma, Dr Mridul K. Saggar and Dr Michael Debabrata Patra.

RBI's bi-monthly policy came even as the second wave of Covid pandemic has started to slow down due to the fall in daily number  cases.

Quick highlights:

  • The RBI aims to maintain the inflation rate between 2 to 6%.
  • The reverse repo rate also stands unchanged at 3.35%.
  • The members of the MPC voted unanimously in favour of the decision.
  • The marginal standing facility (MSF) rate and the Bank Rate are at 4.25%.

The RBI is maintaining the accommodative stance since February 2019 MPC meeting. RBI has projected India’s GDP growth at 9.5 per cent for the ongoing Financial Year of 2021-2022. RBI has kept repo rate unchanged at 4 per cent, sixth time in a row. The RBI reverse repo rate or RBI’s borrowing rate also remains unchanged at 3.35 percent. RBI has also maintained accommodative monetary policy stance to support growth and kept inflation at targeted level.

Following are the Highlights of today's Monetary Policy:

  1. Besides, unchanged repo rate and reverse repo rate, the MPC decided to keep the bank rates the same too at 4.25 per cent.
  2. The economic growth forecast was cut to 9.5 per cent for the current fiscal from the previous 10.5 per cent, announced Das. Das said 18.5 per cent real GDP growth is expected in the first quarter, 7.9 per cent in the second quarter, 7.2 per cent in the third quarter and 6.6 per cent in the fourth quarter of 2021-22.
  3. RBI's MPC has projected the consumer price inflation (CPI) at 5.1 per cent during 2021-22. RBI governor Das announced 5.2 per cent CPI in the first quarter, 5.2 per cent in the second quarter, 4.7 per cent in the third quarter and 5.3 per cent in the fourth quarter.
  4. Das especially commended the resilience of the farm economy, however, the dent in urban demand and spread of infection in rural India poses risks to the normalisation of the economy, he said. A normal monsoon, resilience of agriculture and farm economy, adoption of Covid-compatible business models and gathering momentum of global recovery can help revive the domestic economy when the second wave of coronavirus disease abates, the governor said.

5. The governor said it has been observed that the mobility indicators declined but were                 seen above the levels of last year. The impact on economic activities due to the second              wave of the virus is expected to be relatively contained in comparison to that of the first           wave, with restrictions on mobility being nuanced and regionalised.

  1. Further on the assessment of growth and inflation, the MPC observed that India's exports in March, April and May 2021 have been on an upswing. "Conducive external conditions are forming for a durable recovery beyond pre-pandemic levels, targeted policy support for exports is need of the hour," Das said.
  2. The governor of the central bank said that the focus of RBI is turning from systemic liquidity to equitable distribution. He also added that the vaccine policy of the country is expected to gather steam in the coming months and should help normalise economic activities.
  3. RBI took several steps to inject liquidity in the economy as it conducted regular Open Market Operations (OMO) to the tune of ₹36,545 crore till May 31, Das said. This was in addition to ₹60,000 crore under the G-SAP 1.0.
  4. Das also highlighted that the country's foreign exchange reserves touched $598.2 billion as of May 28. The forex reserves are at a striking distance of reaching $600 billion.
  5. Policy measures decided by the MPC panel to boost economic recovery include opening ₹15,000 crore window till March 2022. Banks can provide fresh lending support to restaurants, adventure and heritage, aviation ancillary, private bus operators, rental car service providers among others in the hospitality industry that suffered significant damage from the pandemic.
  6. To ensure further support to the medium, small, micro enterprises (MSMEs), RBI has lent ₹50,000 crore support to all Indian financial institutions. Of this, ₹15,000 crore support is provided to the Small Industries Development Bank of India (SIDBI) for aid to the MSMEs.
  7. Special liquidity facility of Rs 16,000 cr extended to Sidbi to support MSMEs
  8. Banks to be allowed to restructure loans up to Rs 50 crore
  9. RBI to conduct G-SAP of Rs 1.2 trillion in Q2
  10. NACH facility to be available on all days of the week from August 1.
  11. Coverage of Covid 2.0 recast scheme from Rs 25 crore to Rs 50 crore to cover more MSMEs and small businesses





Key takeaways from RBI Governor Shaktikanta Das’ speech

1. Retaining benchmark rates

RBI chose to stick to the script at today's monetary policy meeting, retaining benchmark rates where they were through the last several policy calls. The repo rate was kept at 4%, indicating that the central bank's dovish stance will continue in order to help an economy battling for revival. The reverse repo rate (RBI’s borrowing rate) was retained at 3.35%. The MPC voted unanimously to keep the repo, the reverse repo and all other rates unchanged, Governor Shaktikanta Das said.

2. RBI cuts FY22 GDP growth forecast to 9.5% - Hoping for a bounce back

The growth projection for FY22 was scaled down to 9.5% in view of the pain inflicted by Covid's second wave. The stance will continue to be accommodative, Das said. Earlier, RBI had pegged its growth forecasts for this financial year at 10.5%. There were expectations that the forecast could be lowered, given the recent hit of the second-wave lockdowns on economic activity. Some economists, however, had said that there might not be any change to the forecast, given a recent series of positive news such as a normal monsoon, rising vaccinations and a comeback of pent-up demand.

3. Keeping borrowing costs low - RBI sees retail inflation at 5.1%

The governor said that while the latest inflation scenario provides some elbow room to policymakers, support will be needed from all sides for the economy to regain momentum. The MPC now sees CPI inflation at 5.1% in 2021-22; 5.2% in Q1, 5.4% in Q2, 4.7% in Q3 and 5.3% in Q4. It had earlier pegged it at 5.2% for Q1 and Q2, 4.4% for Q3 and 5.1% for Q4. Das reiterated the central bank's determination to keep borrowing costs low for the government as well as corporates by buying more bonds.

4. Relief for borrowers - Enhancement of the exposure thresholds under Resolution Framework 2.0

Leading up to the meeting, the push for some more relief to stressed borrowers was also on the rise. An extension to the ongoing loan restructuring programme was being sought by banks till 2023-end. Banks were also asking RBI to permit borrowers to have access to higher amounts of working capital loans until the end of Q2. The original deadline for this had expired in March. A normal monsoon to provide tailwind for economic revival, said the governor. The RBI will continue operation to ensure smooth liquidity management, he said.

5. Doubling loan restructuring

Another important announcement pertained to doubling loan restructuring limits for struggling small companies - which have been hit more severely by the second wave - to Rs 50 crore from Rs 25 crore. Das said that a rebound is taking hold as far as global demand is concerned, which should make for an export boost. Also, during the course of his address, Das mentioned that India's forex reserves may have exceeded a record $600 billion, which makes RBI's intervention complex.

6. Availability of NACH on all days of the week

The RBI governor announced that the National Automated Clearing House (NACH), which is a bulk payment system operated by the NPCI, emerged as a popular and prominent mode of direct benefit transfer (DBT) to large number of beneficiaries. He said that this service is presently available on bank working days, but it is proposed to be functional on all days a week from August 1, 2021.

7. Special Liquidity Facility to SIDBI

The RBI decided to extend a special liquidity facility of Rs 16,000 crore to the Small Industries Development Bank of India (SIDBI) for lending to MSMEs, directly or indirectly over and above the quantum of Rs 50,000 crore that was set aside for government financial institutions in the April policy.

This facility will be available at the prevailing policy repo rate for a period of up to one year, which may be further extended depending on its usage.

8. On-tap Liquidity for contact-intensive sectors

Shaktikanta Das announced that the RBI will open a Rs 15,000 crore on-tap liquidity at repo rate for contact intensive sectors till March 31, 2022, with tenors of up to three years.

Under this scheme, banks can provide fresh lending support to hotels and restaurants; tourism – travel agents, tour operators and adventure/heritage facilities; aviation ancillary services – ground handling and supply chain; and other services that include private bus operators, car repair services, rent-a-car service providers, event/conference organizers, spa clinics, and beauty parlours/saloons.

The RBI governor said that by way of an incentive, the banks will be permitted to park their surplus liquidity up to the size of the loan book created under this scheme with RBI under the reverse repo window at a rate which is 25 bps lower than the repo rate or, termed in a different way, 40 bps higher than the reverse repo rate.

Please click on the following link for: Governor’s Statement, June 4, 2021Monetary Policy Statement, 2021-22 Resolution of the Monetary Policy Committee (MPC) June 2-4, 2021

(Source/References: rbi.org.in, Economic Times, Business Standard, Indian Express, Money Control,
https://groww.in/blog/rbi-monetary-policy-key-highlights, https://www.hindustantimes.com/india-news/rbi-monetary-policy-highlights-from-unchanged-repo-rate-to-reduced-economic-growth-forecast-101622781067505.html)

Reflections /Opinions from the Analysts on today's Monetary Policy:

Industry Reactions- Financial Services 
Raghu Kumar, Co-founder of RAIN Fund - an algo trading platform

There was no surprise today, with the RBI keeping its headline key lending rate unchanged at 4% as per market expectations. The bigger takeaway was a downward revision of real GDP growth for 2021-2022. While earlier the figure was 10.5%, the expectation is now at 9.5%. This was largely driven by a downward revision of Q1 GDP, which was expected to come in at 26.2% but was revised down to 18.5%, a delta of -7.7 percentage points. We hope that going forward, GDP numbers will be aligned with expectations. In intraday trading, the markets have been flat through the day.

Shrikant Chouhan, Executive Vice President, Equity Technical Research at Kotak Securities
Today, the market remained completely flat, however, select mid-cap and small-cap stocks closed higher with decent gains. The NBFCs closed higher while the bank stocks ended lower. Global facing auto companies like Bharat Forge and Tata Motors did exceptionally well and closed at the highest point of the day. We saw some value buying in the metal sector and stocks like NMDC, VEDL and JSW STEEL closed in the positive territory. On a weekly basis, for the third consecutive week, the market closed in the positive territory under the leadership of the Energy sector. NBFCs, Auto and Commodities also helped the market to close above the highest level of the previous rally which was at 15431. During the week FIIs sold to the tune of Rs 4500 crores but in the month of June, to date, the FIIs infused net Rs 1550 crores in the equities.  Technically, the 15550 and 15400 levles would be major supports for Nifty and on the higher side 15800, 16000 and 16200 would be major levels to arrest the bull run. The basic trend of the market is bullish but in the absence of domestic flows, our markets would start following the global cues, which are mixed and sensitive to the pace of inflation. In the coming week, global cues could dominate the market. For the week the strategy should be to buy on dips between 15550/15450 with a final stop loss at 15350 levels. The focus should be on Auto, Insurance, Commodities and technology companies.

Arun Nayyar, CEO, NeoGrowth Credit Pvt Ltd- 
RBI has maintained stability in interest rate and liquidity in the system. This will encourage the credit off-take and maintain benign interest rate scenario in the money market system. The special liquidity to SME sectors is the further boost to GDP growth for FY2022

Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance Co. Ltd: 
While the MPC has toned down the GDP forecast to 9.5%, it has resorted to extend measures to support growth. The extension of separate liquidity window for contact intensive sectors along with additional liquidity to SIDBI and the expansion of the scope of restructuring 2 framework to more borrowers, is indeed a welcome move for the liquidity strapped sectors. Overall, a Growth supportive policy focused on nurturing the nascent growth in the econom

Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance Co. Ltd: 
With Today's Policy verdict, RBI continues to showcase its unflinching resolve to support the markets and economy, at a time when it’s juxtaposed with twin challenges of growth due to second Covid wave and rising commodity prices obscuring the inflation outlook. The MPC has extended the financial safety net to assuage the stress in the system, while reassuring the market of maintaining ample liquidity and remaining accommodative to nurture growth as long as necessary. The targeted redressal of concerns around absorption of elevated borrowing programme in FY22 by way of announcing another round of GSAP 2 of 1.2 lakh cr, is indeed another hallmark move by MPC.

Rajee R, Chief Ratings Officer, Brickwork Ratings
In line with BWR expectations, RBI has maintained its status quo on policy while reiterating that this stance will continue as long as necessary to support growth and help an economy battling for revival. Opening a Rs 15,000 crore On-Tap Liquidity Window for the stressed contact intensive sectors is expected to provide much-needed succour. Continuing with its measures to ensure smooth liquidity management and accommodative financial conditions, RBI announced G-SAP 2.0 of Rs 1.2 lakh crores. SLF of Rs 16,000 Crore to SIDBI for on-lending and refinancing and the enhancement in limit for restructuring of loans by banks to Rs 50 crore from Rs 25 crore are welcome moves to support MSMEs. We expect that the steps announced would increase consumption demand and aid incremental economic activity.

CH. S. S. Mallikarjuna Rao, MD & CEO, PNB: 
The RBI has once again come out with proactive set of announcements to revive the economic growth amid surge in second wave of pandemic. The decision of keeping the repo rate unchanged along with maintenance of accommodative stance is on expected lines and necessary to mitigate the growth uncertainty and inflation concerns. Announcement of on tap liquidity facility of Rs 15,000 crore will ensure credit flow to the contact intensive sectors and MSMEs including hotels, tourism, aviation, etc. which have been adversely impacted. Further, resolution of stress of MSMEs has also been addressed through enhancement of exposure thresholds to Rs. 50 crore under resolution framework 2.0. Availability of NACH on all days of the week will further the financial inclusion objectives through Direct Benefit Transfer (DBT).

Pallavi Shrivastava, Co-founder, Progcap:
We welcome RBI’s restructuring scheme under resolution framework 2.0 as it offers the much-needed relief to select MSMEs, non MSMEs small businesses which have been impacted drastically in the second wave of Pandemic The availment of this restructuring scheme will not only ensure smooth flow of liquidity, at reasonable costs but will also benefit the MSME’s in long run by restructuring the account without classifying it as an NPA. Further, it will act as an opportunity for lenders like us to grant surplus financial support that will empower small and medium businesses (SMBs) to progress without obstacles.

Ram Raheja - Director, S Raheja Realty: While repo rate will continue at 4.00% and reverse repo rate at 3.35% amid Covid-19 uncertainty, most banks have used this as the benchmark for their loans. A continuation of this low interest rate regime works well for borrowers. With no hike in repo rate, homebuyers can plan for a home loan in the near future while also getting enough time for their home buying process and still can get loans at prevailing low rates. At today’s time as we are seeing RBI and banks are now focusing on other essential sectors to bring all sectors back in green which will work well in reshaping the economy.

Gaurav Awasthi, Senior Partner, IIFL Wealth Management: The RBI policy was on expected lines with no change in rates and a continued accommodative stance. The RBI maintains its focus on supporting growth and ensuring orderly interest rates . The increased GSAP allocation was in line with its focus. GDP projections were reduced downwards to incorporate the impact of the second wave of the pandemic on the economy. The inflation projections need to be tracked aggressively given the emergence of commodity and food inflation globally since a comeback of inflation may make the job of RBI more tricky going ahead.

George Alexander Muthoot, Managing Director at Muthoot Finance: RBI left the policy rates unchanged for sixth straight time and has avowed to continue accommodative stance as long as necessary to revive growth and help sustain it on a durable basis. This commitment by the central bank was supported by additional measures announced today such as a separate liquidity window of Rs. 15,000 crore for certain contact-intensive sectors and enhancing exposure threshold to Rs. 50 crore from Rs. 25 crore for MSMEs, small businesses and individuals for business loan purposes under Resolution Framework 2.0. Such steps will help borrowers to better mitigate the impact of pandemic’s second wave and we stand resolutely with every Indian to support all finance needs for a truly Atmanirbhar Bharat.”

Anagha Deodhar – Chief Economist, ICICI Securities: As expected, the MPC voted unanimously to keep repo rate unchanged and the stance of monetary policy ‘accommodative as long as necessary’. The decision to hold rates came on the back of a difficult backdrop of slowing growth are rising inflation. The MPC upped inflation forecast for better part of FY22 by 20-30bps and lowered GDP growth forecast sharply to 9.5%, mainly due to lower than expected growth in H1FY22. This shows that the committee’s priority is supporting growth recovery. The RBI also announced on-tap liquidity window of Rs 150bn for contact-intensive sectors, additional liquidity facility of Rs 160bn to SIDBI and enhanced the threshold for resolution. Moreover, it announced purchase of government securities worth Rs 1.2trn under GSAP 2.0 in Q2FY22. All these measures together are likely to keep financial conditions in the economy benign and support recovery.

Industry Reactions - Real Estate 
>> Surendra Hiranandani, chairman and Managing Director, House of Hiranandani: These set of buyers are apprehensive in coming ahead and have instead chosen to wait to buy a home. There is a need for stimulant policy measures that would enhance liquidity for the sector, ease credit provisions and increases buyers’ confidence.
>> Lincoln Bennet Rodrigues, founder and chairman, Bennet & Bernard Group, known for luxury holiday homes in Goa: Going forward, we would also like to see reduction in stamp duty and registration charges to push demand further in the real estate sector that forms the backbone of several other sectors.
>> Amit Goyal, CEO, India Sotheby's International Realty: Unchanged rated were a big positive and for a homebuyer, interest rates on loans would continue to remain at a historic low.
>> Ankit Kansal, founder and MD 360 Realtors: Pent up demand, structural transformations, and a healthy economic outlook ( around 8-9% for FY 22) would drive the market in a positive direction. Authorities should look into rising prices of key construction materials such as cement and steel.

Industry Reactions - Real Estate 
Samantak Das, chief economist and Head of Research & REIS (India): Recovery in residential real estate that was witnessed during January-March 2021 quarter was impacted by the lockdowns introduced to control the pandemic resurgence. Though the competitive mortgage rates are expected to provide long-term support for sustained growth of real estate, overall economic recovery leading to job and income growth will be contributing factors for housing demand. We believe that low home loan interest rates, realistic property pricing, the focus of developers on project completion and economic recovery will take the residential sales in all likelihood to better levels than 2020.

Anuj Puri, Chairman,  ANAROCK Property Consultants: It is certainly positive for home-loan borrowers as the floating retail loan rates (which are directly linked to external benchmark repo rates) have been at the lowest level of the last two decades. The continuation of the low-interest rate regime would work well for all borrowers as the high affordability environment was likely to continue for some more time, he said.

Amar Ambani, Senior President and Head of Research – Institutional Equities, Yes Securities: With growth slowing and rise in inflationary pressures, RBI expectedly kept a status quo on the policy rates and maintained accommodative stance, signalling continuation of easy financial conditions. Downward revision in FY22 GDP growth projection to 9.5% was quite expected, but seems little optimistic when compared with consensus estimates. Nevertheless, RBI pursued its broad intent of plugging weak spots in the economy by providing on tap liquidity with additional lending to distressed and contact-sensitive sectors.
On inflation, the CPI projection of an average of 5.1% for FY22 looks credible as higher oil and commodity prices is leading to elevated price pressure. Though healthy monsoon and higher crop output may somewhat contain food inflation. Announcement of another round of G-SAP and devolvement of various bond auctions clearly convey RBI’s stance on interest rates and government borrowing costs.
On the repo rate, we have hit the floor, with further rate cut completely ruled out given the prevalent negative real interest rates. With the space for traditional monetary policy being constricted, we expect the RBI to continue to use its balance sheet to keep financial market conditions easy.

  • JUNE 04, 2021 / 12:55 PM IST

RBI Monetary Policy: Industry Reactions 
Anish Mashruwala, Partner, J Sagar Associates: The RBI Governor’s statement continued the cautionary, caliberated and need-of-the-hour stance of the RBI. Given the clear impact of COVID-19’s second wave on non-urban areas, the focus on the wider local economy, especially the MSME and the mom and po shops which are still vital to the overall fabric of India, has been a major focus of the proposed measures. Having addressed the creation and supply of liquidity, the RBI has consciously considered the need to ensure equal distribution of credit and liquidity to the particularly affected sectors. The specific measures, namely liquidity to the contact intensive businesses which have faced the largest brunt of the pandemic, the expansion of the borrower coverage by doubling the maximum exposure threshold to Rs 50 crores and the additional liquidity via SIDBI to cater to these needs, are all welcome to support the overall growth of the Indian economy. In that sense today’s statement reflects the much needed moral compass of a national institution in times of a pandemic.

RBI Monetary Policy: Industry Reactions 
Jimeet Modi, Founder & CEO Samco Group: Exactly a year ago, RBI had cut the repo rate down to 4% from 5.15%, pre-pandemic levels and the rates have remained unchanged till now. India’s accommodative stance continues to remain inline with global peers such as Fed and ECB and this times policy was also aligned with market expectations. The spectrum of forecasts both in terms of GDP and inflation were balanced out and remained more or less on the optimistic side. The RBI has indeed given a helping hand, in whatever way possible to boost liquidity for MSMEs, the hardest hit space in this pandemic. Support to the contact intensive sectors is definitely a move in the right direction although the relief package could have been higher to hold the bottom of the pyramid from losing ground. Various other decisions in terms of opening the debt markets to FPIs and facilitating a Rs. 1.2 Lakh Cr in Q2FY22 for GSAP2.0 will aid to safeguard our economy from contraction and keep markets buoyant.

RBI Monetary Policy: Industry Reactions - Funds 
Sandeep Bagla, CEO Trust AMC:
RBI has maintained accommodative stance, keeping all rates unchanged, vowing to keep conditions as supportive as possible to revive growth. Impact of second wave on inflation could be handled through supply side measures. The policy bodes well for financial assets as well as the real economy, growth and employment as RBI has again stated its resolve to maintain conducive conditions to support durable growth. The policy is pragmatic, at the same time progressive and preemptive in its approach.

Industry Reactions- Representative Body 
Dr. Rajeev Singh, Director General, Indian Chamber of Commerce (ICC) 

ICC highly appreciates Apex Bank’s decision to step up its efforts to ensure liquidity in the system with another G-SAP worth Rs. 1.2 lakh crore planned for this fiscal year. In addition to that, RBI has kept the repo rate unchanged at 4 per cent. Which, ICC feels shall further help home buyers. As prevailing low home loan rates are already enticing for homebuyers, with inflation set to be high and economic recovery slow due to surge of Covid, residential real estate will continue to attract investment as it is a safe-haven asset.

Expert Reactions - Advisory Services 
Kunal Valia, Advisor, Smart Beta and Index Strategies at Waterfield Advisors
: Lower for Longer is the message from the Reserve Bank of India. The Central bank's focus on Growth over inflation continued from the last policy meet in April. During the current year so far, the RBI has undertaken regular OMOs and injected additional liquidity to the tune of Rs 36,545 crore (up to May 31) in addition to Rs 60,000 crore under G-SAP 1.0. RBI further announced bond purchases of Rs 40,000 crore under G-SAP 1.0 in June 2021. It has also been decided to undertake G-SAP 2.0 in Q2:2021-22 and conduct secondary market purchase operations of Rs 1.20 lakh crore to support the market.

Expert Reactions - Economist 
Indranil Pan, Chief Economist at YES Bank: As was expected, there were no change in the headline monetary policy rates as also the stance. In his statement, the Governor acknowledges the growth risks and now projects a lower real GDP growth for the year at 9.5 percent. Inflation projections have been raised too. Given the current evolution of the growth-inflation dynamics, there was absolutely no scope for the RBI to change its policy rates. Instead, the RBI endeavoured to keep the system fluid with adequate liquidity and also targeting rescue operations for the most stressed sectors in the economy. Consequently, a liquidity window was opened up for the contact intensive sectors that continue to totter with the burden of the pandemic. SIDBI was provided with a special liquidity facility to on-lend to MSMEs, specially the smaller ones. To enable the government to borrow at attractive rates, another round of bond buying was announced under G-SAP 1.0 while a G-SAP 2.0 was announced. We think that over the current FY, the RBI will not have any leeway to change its interest rates to provide support to the economy. Instead, it will do whatever necessary to push credit and liquidity to the stressed areas of the economy so as to prevent erosion of the supply chains in the economy.

Source: Money Control - https://www.moneycontrol.com/news/business/economy/rbi-monetary-policy-2021-live-updates-repo-rate-unchanged-shaktikanta-das-6983411.html

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