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Highlights of Bi- Monthly Monetary Policy Committee (MPC) 2020-21: October 2020

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Highlights of Bi- Monthly Monetary Policy CommitteeThe 6-member 25th Monetary Policy Committee (MPC) meeting of Reserve Bank of India (RBI) was held from October 7-9, 2020 which was headed by RBI Governor Shaktikanta Das. Notably for this meeting, the MPC got three new members replacing earlier ones (Ravindra Dholakia, Pami Dua and Chetan Ghate) as their four-year tenure ended in September 2020. They were appointed as the external members by the Central Government for a four years term as the MPC members are not eligible for reappointment.

The new members are:

  • Dr. Ashima Goyal, Economic Advisory Council to the Prime Minister (EAC-PM) member
  • Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research (NCAER) 
  • Professor Jayanth Varma, Indian Institute of Management (IIM)-Ahmedabad (Gujarat)
  • The other two MPC members are Dr. Mridul K. Saggar, and Dr. Michael Debabrata Patra.

During the meeting it was projected that the economy will contract by 9.5% in 2020-21 amid COVID-19 with risks tilted to the downside: -9.8% in Q2/2020-21, -5.6% in the third quarter, and 0.5% in the fourth quarter. 

  • GDP (Gross Domestic Product) growth for the first quarter of 2021-22 is placed at 20.6%.
  • Consumer price index (CPI) inflation is projected at 6.8% for Q2/2020-21 at 5.4-4.5% for H2/2020-21 and 4.3% for Q1/2021-22.

It was also decided to keep the rates unchanged which are as follows:

Category Rate
Policy Repo Rate 4.0%
Reverse Repo Rate 3.35%
Marginal Standing Facility (MSF) Rate 4.25%
Bank Rate 4.25%

The above decisions have been taken to achieve the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

–RBI to conduct on-tap TLTRO worth Rs 1 lakh cr; ;Non-SLR investments of banks rose to 1.8% in H1:2020-21

In order to maintain comfortable liquidity in the banking system, RBI decided to conduct on-tap targeted long-term repo operations (TLTRO) worth Rs 1 lakh crore with tenors of up to three years at a floating rate linked to the policy repo rate till March 31, 2021.

  • Due to TLTROs, non-SLR (Statutory liquidity ratio) investments of banks (comprising investments in commercial papers (CPs), bonds, debentures and shares of public and private corporates) increased by 1.8% in H1:2020-21 as against a decline of 3.9% in H1:2019-20.
  • It should be noted that the banks that had availed of funds earlier under TLTRO and TLTRO 2.0 will be given the option of reversing these transactions before maturity.

What are targeted long-term repo operations (TLTRO)?

LTRO(TLTRO) is a tool that lets banks borrow one to three-year funds from the central bank at the repo rate, by providing government securities with similar or higher tenure as collateral. This simulates bank lending which leads to efficient liquidity in the economy.

–In a First, RBI to Buy State Government Bonds; Rs 20,000 crore-OMO auction next week

In a first-of-its-kind measure, the Reserve Bank of India will buy bonds issued by state governments i.e. state development loans (SDL) in the current financial year (FY21) as a special case via secondary market open market operations(OMO), to ensure they don’t face rising interest costs amid high borrowings.

  • The decision regarding this measure has been taken to ensure that financial conditions don’t tighten and to improve liquidity and facilitate efficient pricing.
  • Notably, SDLs are eligible collateral for Liquidity Adjustment Facility (LAF) along with T-bills, dated government securities and oil bonds.
  • According to ICRA (formerly Investment Information and Credit Rating Agency of India Limited) Ratings, State governments have borrowed nearly Rs 3.76 lakh crore through SDLs between April and the first week of October, 53.6% higher than during the same period in 2019.

Rs 20,000 crore-OMO auction next week

RBI has also increased the size of each OMO for central government bonds to Rs 20,000 crore from Rs 10,000 crore, the purchase of which will be conducted next week.

What is OMO?

OMO is a part of “Operation Twist” to ease pressure evolving liquidity and market conditions. The main purpose of the OMO is to bring down the yields at the longer end.

–SLR Holdings in Held to Maturity (HTM) category extended till March 31, 2022

The apex bank has decided to extend the dispensation of the enhanced held-to maturity (HTM) limit of 22% up to March 31, 2022 from March 31, 2021 for the securities acquired between September 1, 2020, and March 31, 2021.

  • This decision has been taken to give more certainty to the markets about the status of these investments in SLR (Statutory Liquidity Ratio) securities.
  • HTMs are the securities purchased by banks to be owned until maturity.

Background:

On September 1, 2020, RBI has decided to increase the limits under Held to Maturity (HTM) category from 19.5 per cent to 22 percent of NDTL, in respect of SLR securities acquired on or after September 1, 2020, up to March 31, 2021. 

–RBI broadens co-origination model for PSL to “Co-Lending Model”, all NBFCs can collaborate with banks

The framework “co-origination model” that has been put in place by Reserve Bank in 2018 under which there is co-origination of loans banks and a certain category of Non Banking Financial Companies (NBFCs) lends to the priority sector subject to certain conditions has now extended to all the NBFCs. Means housing finance companies (HFCs) will also be able to partner with banks for priority sector lending (PSL).

  • From now, this framework will be known as “Co-Lending Model” and the revised guidelines for the same will be issued by the end of October 2020.
  • This decision has been taken to make all priority sector loans eligible for the scheme and give greater operational flexibility to the lending institutions.

What is a PSL system?

In order to uplift certain disadvantaged sectors of the society RBI initiated PSL lending which mandates banks to allocate over 40 % of their annual lending to these sectors with sub-sector limits.

–RBI to discontinue system-based automatic caution-listing of exporters

Amid COVID-19, there is contraction in external demand. So, in order to provide flexibility to exporters and to empower them to negotiate better terms with overseas buyers the MPC has decided to discontinue the system-based automatic caution-listing of exporters.

  • Therefore, now RBI undertakes caution-listing on the basis of case-specific recommendations of the Authorised Dealer (AD) bank.

What is automatic caution-listing of exporters?

In 2016, RBI launched the system-based automatic caution-listing wherein exporters were put on RBI’s caution list if any shipping bill against them remained open for more than two years in Export Data Processing and Monitoring System (EDPMS).

Point to be noted:

India’s exports grew by 5.27% year-on-year to $27.4 billion in September, 2020, after 6-month continuous contraction while trade deficit narrowed to a three-month low of $2.91 billion.

–RBI allows 24×7 x 365 availability of RTGS system from December

RBI has decided to allow real-time gross settlement (RTGS) facility round the clock i.e. 24*7*365 starting December 2020. This decision has been taken to provide wider payment flexibility to domestic corporates and institutions and to facilitate India’s efforts to develop international financial centers. With this, India will be among very few countries globally with a 24x7x365 large value real-time payment system.

  • Currently this service is available between 7 a.m. and 6 p.m. on all working days of the week.
  • RTGS facility is typically used by companies to transfer large sums of money for payments or repayments. The minimum amount for RTGS transfer is Rs 2 Lakh with no or maximum ceiling.
  • In December 2019, the RBI made all transactions through the National Electronic Fund Transfer (NEFT) facility 24×7. 

–RBI to grant perpetual validity for Certificate of Authorisation (CoA) issued to PSOs 

The central bank decided to grant authorization to all payment system operators (both new applicants as well as existing PSOs) on a perpetual basis, from the current time period of five years to reduce licensing uncertainties. Perpetual validity here means lifetime validity with subject to certain conditions as mandated by the RBI.

  • Currently, the RBI issues “on-tap” authorisation under the Payment and Settlement Systems Act, 2007 to non-banks issuing Prepaid Payment Instruments (PPIs), operating White Label ATMs (WLAs) or the Trade Receivables Discounting Systems (TReDS), or participating as Bharat Bill Payment Operating Units (BBPOUs).

–RBI tweaks home loan rules to boost real estate sector

Under the current regulations, differential risk weights are applicable to individual home loans, based on the size of the loan (particularly below Rs 75 lakhs) as well as the loan-to-value ratio (LTV) and RBI rationalised these risk weights until March, 2020.  Risk weight is the capital that banks set aside after granting loans.

Now, to boost the real estate sector, RBI tweaked rules for new home loans by removing the loan size till 31 March 2022. This will enable banks to push housing loans with attractive offers for high-value properties without worrying about a higher capital charge.

  • Such loans will attract a risk weight of 35% where LTV is less than or equal to 80%, and a risk weight of 50% where LTV is more than 80% but less than or equal to 90%.

What is loan-to-value (LTV)?

It is used to assess the risk that banks and other lenders associate with a mortgage. A higher LTV for a loan assessment means that the lender associates higher risk with it. LTV is used to ascertain the loan amount with respect to the value of the property can be granted to a borrower.

–RBI Revised Limit for Risk Weight to Rs 7.5 cr to Rs 5 Cr

RBI also decided that banks can lend up to Rs 7.5 crore from earlier Rs 5 crore to individual retail and small business borrowers (i.e. with turnover of upto Rs 50 crore) and still be eligible for a 75% risk weight. 

  • This decision is on the lines to reduce the cost of credit for this segment, and in harmonisation with the Basel guidelines.

–Manufacturing PMI for September 2020 highest since January 2012 at 56.8

The manufacturing purchasing managers’ index (PMI) rose to 56.8 for September 2020 from 52 in August 2020. This rise is the highest since January 2012.

  • On the other hand, the services PMI for September, 2020 at 49.8 remained in contraction but rose from 41.8 in August, 2020.
  • PMI is an indicator of business activity in the manufacturing and services sector.

–Interest subvention on MSME loans extended till end of March 2021

The RBI has extended the 2% interest subvention scheme for micro, small and medium enterprises (MSMEs) on loans offered by co-operative banks has been extended for FY20-21 i.e. till March 31, 2021. The coverage of the scheme is limited to all term loans and working capital to the extent of Rs 100 lakh.

Background:

The government had announced the ‘Interest Subvention Scheme for MSMEs 2018’ in November 2018 for scheduled commercial banks for two financial years 2018-19 and 2019-20 to provide an interest relief of 2% per annum to eligible MSMEs.

Static Points:

Repo Rate: It is the rate at which RBI lends money to commercial banks.

Reverse Repo rate: It is the rate at which RBI borrows money from commercial banks. 

Cash Reserve Ratio (CRR): The share of net demand and time liabilities (deposits) that banks must maintain a cash balance with the RBI.

Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities (deposits) that banks must maintain in safe and liquid assets, such as government securities, cash, and gold.

Bank Rate: It is the rate at which the RBI is ready to buy or rediscount bills of exchange or other commercial papers for the long term.

Marginal Standing Facility Rate (MSF): The rate at which the scheduled banks can borrow funds from the RBI overnight, against the approved government securities is termed as MSF.

Recent Related News:

i.On September 4, 2020, RBI reviewed the Priority Sector Lending (PSL) Guidelines to align it with emerging national priorities amid COVID-19 impact. In this regard, new categories are included under priority sector for financing viz. start-ups (up to Rs 50 crore); loans to farmers for installation of solar power plants for solarisation of grid connected agriculture pumps and loans for setting up Compressed Bio Gas (CBG) plants.

ii.On September 15, 2020, RBI issued Draft Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2020 under Section 45 W of the RBI Act, 1934 to allow foreign portfolio investors (FPIs) to undertake exchange-traded rupee interest rate derivatives transactions subject to an overall ceiling of Rs 5,000 crore.

About Reserve Bank of India (RBI):
Headquarters– Mumbai, Maharashtra
Formation– 1 April 1935
Deputy Governors– 4 (Bibhu Prasad Kanungo, Mahesh Kumar Jain, Michael Debabrata Patra, one is yet to be appointed