RBI Monetary Policy Highlights Dec-20

Repo Rate unchanged | RBI upgrades FY21 GDP Projection to -7.5%

Introduction

RBI Monetary Policy Committee (MPC) in its bi-monthly monetary policy meet decided to keep the repo rate unchanged at 4% and maintained an ‘accommodative’ stance. Also, RBI upgraded the FY21 GDP growth projection to -7.5% from -9.5% projected earlier in Oct-20 MPC Meet.

RBI Monetary Policy Highlights Dec-20

The Key Highlights of RBI’s Bi-Monthly MPC Meet in December 2020 are summarized here:

RBI Monetary Policy Announcements, Inflation & Growth Outlook

Policy Rates & Stance

• Repo Rate is kept unchanged at 4.00%, thus the Reverse Repo Rate has also been kept unchanged at 3.35% and the marginal standing facility (MSF) rate and the Bank Rate at 4.25%.
• The MPC will continue with the accommodative stance as long as necessary during the current financial year, FY21 and into the next financial year, FY22 in order to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward.
• These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

Inflation Outlook

• RBI’s Outlook on Inflation turned adverse after last 2 months CPI inflation (7.3% in Sept & 7.6% in Oct)
• Food Inflation turned double digit in Oct (10.13%), proactive supply-management can reduce prices
• While cereal prices may continue to soften with the bumper kharif harvest arrivals and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels.
• Crude oil prices have picked up on optimism of demand recovery, continuation of OPEC plus production cuts and are expected to remain volatile in the near-term.
• Cost-push pressures continue to impinge on core inflation, which has remained sticky and could firm up as economic activity normalizes and demand picks up.
• Taking into consideration all these factors, Projections on CPI Inflation are :
  1. Q3 FY21 : 6.8%
  2. Q4 FY21 : 5.8%
  3. H1 FY22 : 5.2-4.6%, with risks evenly balanced

Growth Outlook

• Signs of recovery far from being broad-based and is dependent on sustained policy support. Recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum as unlocking spurs economic activity and employment.
• Consumers remain optimistic about the outlook and business sentiment of manufacturing firms is gradually improving. Fiscal stimulus is increasingly moving beyond being supportive of consumption and liquidity to supporting growth-generating investment. 
•  Positive impulses clouded by a possible rise in infections in some parts of the country. Private investment still slack and capacity utilisation has not fully recovered.
• Prospects have brightened with the progress on the vaccines.
• GDP Growth Projections :
  1. FY21 : Real GDP is revised to -7.5% from -9.5% projected earlier in Oct-20 MPC Meet
  2. Q3 FY21 : 0.1%
  3. Q4 FY21 : 0.7%
  4. H1 FY22 : 6.5-21.9%, with risks evenly balanced

Developmental and Regulatory Policies Highlights

A. Liquidity Measures to Revive Activity

1. On Tap TLTRO – Extension of Sectors and Synergy with ECLGS 2.0
   • Banks can avail funds from RBI under TLRO to invest in sectors under Emergency Credit Line Guarantee Scheme (ECLGS 2.0). This will encourage banks to extend credit support to stressed sectors at lower cost.
2. Facilitating  More  Efficient  Liquidity  Management  for  Regional  Rural  Banks  (RRBs)
   • In  order  to  facilitate  more  efficient liquidity management by the RRBs at competitive rates, it has been decided to extend the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) to  RRBs.
   • It  has  also  been  decided to  permit  the  RRBs  to  participate  in  the  Call/Notice money market, both as borrowers and lenders. Detailed instructions in this regard will be issued shortly

B. Regulation and Supervision

1. Dividend Distribution by Banks
   • In  order  to  further strengthen the banks’ balance sheets while at the same time supporting lending to  the  real  economy,  it  has  been  decided,  on  a  review,  that  Scheduled Commercial Banks (SCBs)  and  cooperative  banks shall not make any dividend pay-out from the profits pertaining to financial year 2019-20.
2. Dividend Distribution Policy for NBFCs
   • Different  categories  of  NBFCs would be allowed to declare dividend as per a matrix of parameters, subject to a set of generic conditions.
3. Discussion Paper on Scale-based Regulatory Framework for NBFCs 
   • There have been rapid developments in the last few years, which have led to significant increase in size and interconnectedness of the NBFC sector.
   • Therefore there is a need to review the regulatory  framework  in  line  with  the  changing  risk  profile  of  NBFCs.  It  is  felt  that  a  scale-based  regulatory  approach  linked  to  the  systemic  risk  contribution  of  NBFCs  could  be  the  way  forward. 
4. Strengthening  Audit  Systems  of  Supervised  Entities  (SEs): 
   • Issuance  of  guidelines  to  large  UCBs  and  NBFCs  on  adoption  of  Risk  Based  Internal  Audit  (RBIA); 
   • Harmonisation  of  guidelines  on  appointment  of  statutory  auditors for commercial banks, UCBs and NBFCs 
5. Digital Payment Security Controls
   • It is proposed to issue RBI (Digital  Payment  Security  Controls)  Directions,  2020  for  regulated  entities  to  set  up  a  robust  governance  structure  for  such  systems  and  implement common minimum standards of security controls for channels like internet, mobile banking, card payments, among others.
   • While the guidelines will be technology and  platform  agnostic,  it  will  create  an  enhanced  and  enabling  environment  for customers  to  use  digital  payment  products  in  more  safe  and  secure  manner.

C. Payment and Settlement Systems

1. Enabling Posting of Settlement Files of Payment Systems on all days of the week
   • RTGS system will soon be made 24×7. With round the clock availability of eKuber (core banking system of RBI) and  RTGS  (to  be  operationalised  soon),  it  is  proposed  to  allow  settlement  files  of  payment systems (viz., AePS, IMPS, NETC, NFS,  RuPay,  UPI) to be posted to the Reserve Bank on all days of the year.
   • This measure will reduce build-up of settlemen, default  risks  and  enable  better  management  of  funds  by  member  banks.  It  will  also enhance overall efficiency of the payments ecosystem.
2. Card Transactions in Contactless Mode  and  e-Mandates  on  Cards  for  Recurring Transactions – Enhancement of Limit
   • To  further  the  adoption of digital payments in a safe and secure manner, it is proposed to enhance, at  the  discretion  of  the  user,  the  limits  for  contactless  card  transactions  and  e-mandates for recurring transactions through cards (and UPI) from Rs.2,000 to Rs.5,000 from January 1, 2021.