Highlights of the Fifth Bi-Monthly Monetary Policy of FY21-22

The Reserve Bank of India’s (RBI) 6-members Monetary Policy Committee (MPC) had met on 6th, 7th and 8th December 2021 and released its fifth bi-monthly monetary policy statement for FY22 (April 2021 – March 2022).

Policy Rates:

RBI kept the rates under the liquidity adjustment facility (LAF) unchanged (maintains status quo) for the 9th consecutive time i.e it decided to continue with the accommodative stance to mitigate the impact of COVID-19 on the economy and to revive and sustain growth on a durable basis.

The unchanged Policy rates are as follows:

About Monetary Policy Stances:

Monetary Policy Stances of RBI are classified into Dovish, Hawkish, Accommodative, and Neutral.

i.Hawkish stance: This monetary policy stance supports high interest rates to keep inflation in check. Because of the high interest rates, borrowing i.e. taking loans from banks and other sources will be reduced.

ii.Dovish: It is a stance opposite to the Hawkish stance and this monetary policy stance involves low-interest rates. Low-Interest Rates would induce the consumers to take loans from Banks.

iii.Accommodative: This stance will be used to allow the money supply to rise in line with national income and the demand for money.

• RBI will use the accommodative stance to expand the overall money supply to boost the economy when the economic growth is slowing down.

iv.Neutral: In this stance, the Key Policy Rates are neither increased or decreased.

a.MPC’s Assessments on growth and inflation:     

-Growth 

The MPC has retained India’s real gross domestic product (GDP) growth projection for FY22 at 9.5 percent with 6.6 percent in Q3; and 6.0 percent in Q4. Real GDP growth for Q1 FY23 is projected at 17.2 percent and for Q2 at 7.8 percent.

• As per RBI data, India’s GDP has expanded by 13.7 percent in the first half of 2021-22.
• NSO Data: As per the data released by the National Statistical Office (NSO) on November 30, 2021, real GDP expanded by 8.4 percent year-on-year (y-o-y) in Q2 FY22, following a growth of 20.1 percent during Q1 FY22.

-Inflation

i.Consumer Price Index (CPI)/Retail inflation was projected at 5.3 percent in FY22, with 5.1 percent in Q3 and 5.7 percent in Q4.

ii.CPI inflation for Q1 and Q2 FY23 was projected at 5.0 percent.

iiI.The government retained the inflation target at 4 percent with the lower and upper tolerance levels of 2 percent and 6 percent, i.e. within a band of +/- 2 percent.

Member of MPC:

The MPC meeting was headed by RBI Governor Shaktikanta Das the other 5 members of the committee include,

• Shashanka Bhide, Ashima Goyal, Prof. Jayanth R. Varma, Mridul K. Saggar, and Michael Debabrata Patra

b.MPC’s Measures on Payment and Settlement Systems:

-RBI plans to launch UPI-based payment products for feature phone users

RBI has decided to launch a UPI (Unified Payments Interface)-based payment product for feature phone users to increase digital penetration of financial services and support them to transact digitally without access to smartphones or reliable internet services.

• Feature phones – These are the basic phones, which typically provide voice calling and text messaging functionalities. Some of these devices also have basic multimedia and internet options.
• Currently, UPI requires a smartphone with a working internet connection to send money.

Key Points:

i.As per the Telecom Subscription Data of Telecom Regulatory Authority of India (TRAI), October 2021, India has a large mobile phone consumer base of about 118 crore mobile users, in which around 74 crore (Statista, July 2021) have smartphones thus indicating that there is a significant number of feature phone users.

ii.Feature phone users have limited access to innovative payment products. Even though the feature phones have NUUP (National Unified USSD Platform) as an option for availing basic payment services using the short code of *99#, it has not picked up.

iii.RBI has planned to enable UPI on feature phones as well as smartphones when internet services aren’t available (for quite some time).

iv.Under RBI Regulatory Sandbox, some innovators had successfully demonstrated their solutions to facilitate UPI-based digital payment solutions on feature phones, under the theme of ‘Retail Payments’.

What is a Regulatory sandbox?

i.It usually refers to live testing of new products or services in a controlled regulatory environment for which regulators may (or may not) permit certain relaxations for the limited purpose of the testing.

ii.The objective of the regulatory sandbox is to foster responsible innovation in financial services, promote efficiency and bring benefit to consumers.

-RBI to Issue Discussion Paper on charges in payment systems

RBI has proposed to issue a discussion paper which will cover all aspects related to charges involved in various channels of digital payments such as credit cards, debit cards, prepaid payment instruments (cards and wallets), UPI, etc.

i.Objective:  To have a holistic view of the issues involved and possible approaches to reduce the concerns to make digital transactions more affordable.

ii.The paper will seek feedback on issues related to convenience fees, surcharging, and the measures required to make digital transactions affordable to users and economically remunerative to the providers.

iii.Current Issue:  Entities involved in providing digital payment services incur costs, which are generally recovered from the merchant or the customer or is borne by one or more of the participants.

iv.While there are both advantages and disadvantages of customers bearing these charges, they should be reasonable and should not become a deterrent in the adoption of digital payments.

– RBI to simplify Process Flow for Small Value Transactions over UPI

At times, the low-value transactions over UPI cause customer inconvenience due to transaction failures because of issues related to connectivity.

i.Thus to overcome the issue RBI proposed to offer a simpler process flow by enabling small value transactions through an ‘On-device’ wallet in UPI app which will conserve banks’ system resources, without any change in the transaction experience for the user.

ii.As per the RBI report of October 2021, UPI is the single largest retail payment system in India in terms of volume of transactions with 14 crore transactions per day.

Note – Based on Transaction data analysis, around 50 percent of transactions through UPI were below Rs 200. It shows the success of UPI, as one of the initial objectives of UPI was to replace cash for low-value transactions.

-RBI to Increase in UPI Transaction Limit 

Over time, UPI has also become a popular payment option for Initial Public Offerings (IPOs) since its availability from January 01, 2019. It is reported that IPO applications of Rs 2 to Rs 5 lakh constitute ~10 percent of subscription applications.

• The transaction limit in the UPI system was enhanced from Rs 1 lakh to Rs 2 lakh in March 2020.
• To further encourage the use of UPI by retail investors, it is proposed to enhance the transaction limit for payments through UPI for Retail Direct Scheme and IPO applications from Rs 2 lakh to Rs 5 lakh.

b.Other Measures undertaken by RBI:

-RBI to allow banks to infuse capital in overseas branches without its prior permission

Currently, the banks incorporated in India need to seek prior approval of RBI for infusing capital in their overseas branches and subsidiaries as well as for retention and repatriation/transfer of profits from those centres.

• To provide operational flexibility to banks, RBI has proposed to allow banks to infuse capital in their overseas branches as well as to repatriate profits without seeking prior approval from RBI.
• The banks could infuse capital only after fulfilling the regulatory capital requirements and with the approval of their Boards.

-Review of Prudential Norms for Investment Portfolio of Banks

For the first time in 21 years, the RBI plans to revise norms for investment portfolios of commercial banks to reflect changes in global standards on valuation and measurement, and progress in the domestic market. This could pave the way for banks to transition to the new accounting standards (Ind-AS).

i.Extant regulatory instructions on the classification and valuation of investment portfolios by scheduled commercial banks are based on a framework introduced in October 2000.

ii.As of November 19, 2021, the outstanding investment portfolio of commercial banks was at Rs 45.84 trillion. The investments are mainly in government bonds.

Note – RBI will place a Discussion Paper covering all relevant aspects.

iii.Investment Portfolio: Banks classify their entire investment portfolio under three heads such as ‘held to maturity’ (HTM), ‘available for sale’ (AFS) and ‘held for trading’ (HFT).

• Investments under the HTM category are capped at 25 percent of the bank’s total investments.
• Shifting Categories: Banks have the freedom to shift investments to/from HTM once a year.

-RBI to raise all-in-cost ceiling over ARRs for overseas borrowings

To facilitate smooth transitioning from LIBOR (London Inter-Bank Offered Rate) linked overseas borrowings to market related benchmarks, the RBI has allowed widely accepted interbank rate or alternative reference rate (ARR) for External Commercial Borrowings (ECB)/Trade Credit (TC).

• RBI plans to increase the all-in-cost ceiling for new Foreign Currency (FCY) ECB/TC from 450 basis points (bps) to 500 bps and from 250 bps to 300 bps, respectively, over the alternative reference rates (ARRs).
• Benchmark rate: Currently, the benchmark rate for FCY ECB/TC is specified as a 6-months LIBOR rate or any other 6-month interbank interest rate applicable to the currency of borrowing.

Note – In July 2021, RBI issued an advisory to banks and other RBI-regulated entities for the transition from the international benchmark reference rate, LIBOR, to any other widely accepted ARR. Click here to know more

External Commercial Borrowings (ECB):

• It is a loan (bank loans, buyers’ credit, suppliers’ credit, securitised instruments) availed by an Indian entity from a non-resident lender with a minimum average maturity of 3 years.
• The borrowing limit is about $750 million per financial year.
• The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.

Trade Credit (TC): TC refers to the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for the maturity of less than 3 years.

-RBI to Rebalance Liquidity Surplus

RBI has been rebalancing the liquidity surplus by shifting it out of the fixed-rate overnight reverse repo window into the variable rate reverse repo (VRRR) auctions of longer maturity.

• RBI has proposed to increase the 14-day variable rate reverse repo (VRRR) auction amounts on a fortnightly basis in the manner of  Rs 6.5 lakh crore on December 17, 2021, and further to Rs 7.5 lakh crore on December 31, 2021.
• The central bank has also been conducting 28-day VRRR auctions.
• From January 2022, Liquidity absorption will be undertaken mainly through VRRR Auctions.

-Banks are provided with the option to prepay TLTRO funds

To rebalance the liquidity surplus, RBI has now decided to provide one more option to banks to prepay the outstanding amount of funds availed under the Targeted Long-Term Repo Operations (TLTRO 1.0 and 2.0) that were announced on March 27 and April 17, 2020.

• Banks have already prepaid Rs 37,348 crore in November 2020, which constituted about one-third of Rs 1,12,900 crore availed under the scheme.

Recent Related News:

On November 15, 2021, the Reserve Bank of India (RBI) introduced an Internal Ombudsman (IO) mechanism for certain categories of Non-Banking Financial Companies (NBFCs) that have a higher customer interface.

On September 24, 2021, the Reserve Bank of India (RBI) issued the master directions of RBI (Securitisation of Standard Assets) Directions, 2021, and RBI (Transfer of Loan Exposures) Directions, 2021.

About the Reserve Bank of India (RBI):

Establishment – April 1, 1935
Headquarters – Mumbai, Maharashtra
Governor –  Shaktikanta Das
Deputy Governors – Mahesh Kumar Jain, Michael Debabrata Patra, M. Rajeshwar Rao, T. Rabi Sankar