Highlights of the Second Bi-Monthly Monetary Policy of FY22

The Reserve Bank of India’s (RBI) 6-members Monetary Policy Committee (MPC) had met on 2nd, 3rd and 4th June 2021 and released its second bi-monthly monetary policy statement for FY22 (April 2021 – March 2022).

Policy Rates:

The Policy rates were kept unchanged, which are as follows:

• RBI decided to keep the rates unchanged for the 6th consecutive time.

i.MPC’s Assessments on growth and inflation:

-Growth 

The MPC has projected India’s real gross domestic product (GDP) growth for FY22 at 9.5 percent with 18.5 percent in Q1; 7.9 percent in Q2; 7.2 percent in Q3; and 6.6 percent in Q4. (In April 2021, RBI projected the growth of FY21 at 10.5 percent).

-Inflation

• Consumer Price Index (CPI) inflation/Retail inflation for FY22 was projected at 5.1 percent with 5.2 percent in Q1; 5.4 percent in Q2; 4.7 percent in Q3; and 5.3 percent in Q4.
• 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.

Note – National Statistical Office (NSO) placed India’s real GDP contraction at 7.3 percent for FY21, with GDP growth in Q4 FY21 at 1.6 percent.

Members 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

ii.MPC’s Statement on Developmental and Regulatory Policies:

-RBI opened an On-tap Liquidity Window of Rs 15,000 crore for the Contact-intensive sector

i.RBI opened a separate liquidity window of Rs 15,000 crore with tenors of up to 3 years at the repo rate till March 31, 2022 – for certain contact-intensive sectors.

ii.The Contact-intensive sectors include – hotels and restaurants; tourism – travel agents, tour operators; aviation ancillary services; and other services that include private bus operators, event/conference organisers, spa clinics, and beauty parlours/saloons etc.

iii.Banks that offer such loans will be incentivized by being allowed to park excess liquidity, equivalent to such loan books, under the reverse repo window, at 3.75 percent or 40 basis points higher than the prevailing reverse repo rate.

iv.Existing: In May 2021, RBI opened an on-tap liquidity window of Rs 50,000 crore with tenors of up to 3 years at the repo rate till March 31, 2022, to boost the provision of immediate liquidity for COVID-19 related healthcare infrastructure and services. Click here to know more

-RBI created a Special Liquidity Facility of Rs 16,000 crore for SIDBI

i.RBI set to provide additional special liquidity facility(SLF) of Rs 16,000 crore to Small Industries Development Bank of India (SIDBI) at repo rate for 1 year to on-lend/refinance micro, small and medium enterprises’ (MSMEs) short- and medium-term credit needs through double intermediation, pooled bond/loan issuances, etc.

ii.Background: In April 2021, RBI extended fresh support of Rs 50,000 crore to All India Financial Institutions (AIFIs) for new lending in FY22, which includes SLF of Rs 25,000 crore to National Bank for Agriculture and Rural Development (NABARD), Rs 10,000 crore to the National Housing Bank (NHB) and Rs 15,000 crore to SIDBI.

–RBI enhances exposure thresholds under Resolution Framework 2.0 to Rs 50 crore

i.RBI has enhanced the exposure threshold under Resolution Framework 2.0 to Rs 50 crore from Rs 25 crore.

ii.Background: In May 2021, under relief measures towards COVID-19, RBI allowed banks and non-banks to extend the restructuring loan benefits to individual customers, small businesses, and MSMEs with an exposure of Rs 25 crore through Resolution Framework 2.0.

-RBI to undertake G-SAP 2.0 operation in Q2FY22, to purchase G-Secs of Rs 1.2 lakh crore

i.RBI decided to undertake G-SAP 2.0(G-sec Acquisition Programme) in Q2 FY22 and conduct secondary market purchase operations of Rs 1.20 lakh crore to support the market and decided another operation under G-SAP 1.0 on June 17, 2021, for purchase of G-Secs of Rs 40,000 crore will be conducted and of this, Rs 10,000 crore would constitute a purchase of state development loans (SDLs).

ii.Background: So far in FY22, RBI has undertaken regular OMOs (Open Market Operations) and injected additional liquidity to the tune of ₹36,545 crores (up to May 31, 2021) in addition to Rs 60,000 crores under G-SAP 1.0. (The G-SAP 1.0 will expire in June 2021)

iii.As of May 2021 the Reserve money rose by 12.4 percent (y-o-y), while money supply (M3) grew by 9.9 percent (y-o-y) and bank credit by 6.0 percent (y-o-y) compared to May 2020.

OMO:

• It is the sale and purchase of government securities and treasury bills by the RBI to regulate the money supply in the economy.
• When the RBI wants to increase the money supply in the economy, it purchases the government securities (G-Secs) from the market and sells them to suck out liquidity.

-RBI to permit Authorised Dealer banks for Placement of Margins for G-Secs Transactions on behalf of FPIs 

To ease the operational constraints faced by Foreign Portfolio Investors (FPIs) and promote ease of doing business, RBI has decided to permit Authorised Dealer banks to place margins on behalf of their FPI clients for their transactions in G-Secs (including State Development Loans and Treasury Bills), within the credit risk management framework of banks.

Authorized Dealer (AD):

An Authorised Dealer (AD) is any person specifically authorized by the RBI under Section 10(1) of FEMA (Foreign Exchange Management Act), 1999, to deal in foreign exchange or foreign securities and it normally includes banks.

Foreign portfolio investment:

It is investments that consist of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company’s assets.

-NPCI’s bulk payment system to be available 24X7 from 1 August

RBI made the bulk payment system under the National Automated Clearing House (NACH) to be available on all days of the week (24X7) from 1 August 2021. (Currently, it is operational only on bank working days) for customer convenience, and to take advantage of the availability of Real-Time Gross Settlement (RTGS) on all days of the year.

NACH:

i.NACH was formed by RBI in association with IBA (Indian Banks’ Association) and launched on 1st May 2016 to replace Electronic Clearing System (ECS) by National Payments Corporation of India (NPCI).

ii.It is a centralised web-based bulk transaction processing system for Banks, Financial Institutions, Corporates and Government. It facilitates interbank, high volume, electronic transactions which are repetitive and periodic in nature.

iii.It can be used for making bulk transactions towards the distribution of subsidies, dividends, interest, salary, pension etc. and also for bulk transactions towards the collection of payments pertaining to telephone, electricity, water, loans, investments in mutual funds, insurance premium etc.

-RBI issued direction over Certificate of Deposit

Under section 45W of the RBI Act, 1934 read with section 45U of the Act, RBI issued The Master Direction on RBI (Certificate of Deposit(CD)) Directions, 2021 to all persons and agencies eligible to deal in CD.

Directions over CD by RBI:

i.Eligible issuers of CD: CD could be issued by Scheduled Commercial Banks, Regional Rural Banks, and Small Finance Banks to all residents of India.

ii.Primary issuance:

• CDs shall be issued in a minimum denomination of Rs 5 lakh and in multiples of Rs 5 lakh thereafter.
• It could be issued only in dematerialised form and held with a depository registered with the Securities and Exchange Board of India(SEBI) at a T+1 basis (T – the date of closure of the offer period for CDs issuance).
• The tenor – 7 days to 1 year.

iii.Loans against CDs: Banks are not allowed to grant loans against CDs (unless specifically permitted by RBI).

iv.Buyback of CDs: Issuing banks are enabled to buyback CDs before maturity but only after 7 days of the date of issue of the CD (The investors have the option to accept or reject the buyback offer)

Certificate of Deposit(CD):

It is a negotiable, unsecured money market instrument issued by a bank as a Usance Promissory Note against funds deposited at the bank for a maturity period up to 1 year.

Note – RBI had issued draft directions on CDs in December 2020 (for public comments).

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About Reserve Bank of India(RBI):

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