Repo Rate unchanged | RBI upgrades FY21 GDP Projection to -7.5%
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.
- 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 :
- Q3 FY21 : 6.8%
- Q4 FY21 : 5.8%
- H1 FY22 : 5.2-4.6%, with risks evenly balanced
- 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 :
- FY21 : Real GDP is revised to -7.5% from -9.5% projected earlier in Oct-20 MPC Meet
- Q3 FY21 : 0.1%
- Q4 FY21 : 0.7%
- H1 FY22 : 6.5-21.9%, with risks evenly balanced
Developmental and Regulatory Policies Highlights
A. Liquidity Measures to Revive Activity
- 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.
- 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
- 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.
- 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.
- 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.
- 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
- 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
- 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.
- 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.