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Overview of 6th Bi-monthly monetary policy 2020 released by RBI

On February 6, 2020, The Reserve Bank of India (RBI) announced its 6th Bi-Monthly Monetary Policy Rates for 2020-21 in Mumbai , Maharashtra. The three-day (February 4-6,2020) policy review meeting by the 6 members of Monetary Policy Committee (MPC) was headed by RBI Governor Shaktikanta Das with the members Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Janak Raj, Dr. Michael Debabrata Patra.
The next meeting of the MPC is scheduled during March 31, April 1 and 3, 2020.RBIHighlights of the meet:
The announcements were made in the meeting include:

i.All members of the MPC unanimously voted to keeps repo rate unchanged at 5.15% to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

ii.These decisions are in line with the aim of achieving the medium-term target for consumer price index (CPI) inflation of 4 % while supporting growth.

Current rates:

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Policy Rates under Liquidity Adjustment Facility (LAF)
Repo Rate 5.15%
Reverse Repo Rate 4.90%
Marginal standing facility (MSF) Rate 5.40%
Bank Rate 5.40%
Reserve Ratios
Cash reserve Ratio (CRR) 4%
Statutory Liquidity Ratio (SLR) 18.25%
GDP Prediction
GDP for 2020-21 6 % (from 5 % in FY20)
CPI Inflation
H1:2020-21 5.4-5.0 %

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Note: H1 means fiscal year 1st half. GDP stands for Gross Domestic Product. CPI stands for Consumer Price Index.

GDP growth rate estimated to be 6% in FY21: RBI
The Reserve Bank has projected GDP (Gross Domestic Product) growth forecast for Fiscal Year-FY21 to 6%.It was 5% in FY20.

i.The RBI has estimated the growth for the next financial year at the lower level of the projected economic growth in the Economic Survey. In the Economic Survey presented on 31 January,2020  the GDP growth rate in 2020-21 has been estimated to be 6 – 6.5 %.

ii.The Monetary Policy Committee found that moderation in the economy is still intact and the pace of economic growth remains weak from capacity.

RBI revises CPI inflation target to 6.5% for Q4 of current fiscal
The central bank has revised upward its CPI inflation target to 6.5 % for Quarter(Q4) of current fiscal year 2019-20 (January-March 2020) due to increase in input costs for milk and pulses & volatile crude oil prices.

i.The RBI also predicted an inflation target of 5.4-5.0 % for first half -H1:2020-21 (April-September 2020) and 3.2 % for third quarter (Q3)of 2020-21 (October-December).

ii.Improvement is expected in the private consumption, especially in the rural areas in view of the better prospects of the rabi crop. The recent rise in food prices has done the trade balance in favor of agriculture, this is expected to support rural income. According to RBI, due to softening in the uncertainties of global trade, exports are expected to be encouraged and investment activities will pick up.

RBI extends one-time restructuring Scheme for MSME advance to Dec 31, 2020
The Reserve of Bank has extended the One-time Restructuring Scheme for Micro Small and Medium Enterprises (MSME) by December 31, 2020.

i.This moves comes after Finance Minister (FM) Nirmala Sitharaman, while presenting Union Budget 2020 on 1st February, stated the government has asked the RBI to extend the debt restructuring period by another year ending March 31, 2021.

ii.The recast scheme, announced in January 2019, was to expire on March 31,2020 &the eligibility for the scheme entails that the aggregate exposure including non-fund based facilities of banks and NBFCs (Non-banking financial companies), to a borrower should not exceed 25 crore rupees as on January 1, 2019.

Loans to medium enterprises to be linked to external benchmark starting April1, 2020: RBI
In order to provide enough credit to productive sectors,the Reserve Bank has decided to link loans to medium size enterprises to an external benchmark, starting April 1,2020 .

i.Earlier the RBI had linked all fresh floating-rate loans to the retail sector and to MSMEs(Micro, Small and Medium Enterprises effective from October 1, 2019.

RBI announces new liquidity management framework
The Reserve Bank has decided to revise its liquidity management framework through which it controlling cash in the banking system, strengthening monetary transmission, strengthening regulation and supervision, broadening and deepening financial markets.

Some key points of the revised framework:

i.The weighted average call rate (WACR) will continue to be the operating target of monetary policy & liquidity management is remain at the same pace.

ii.The key liquidity management tool for managing frictional liquidity requirements will be a 14-day term repo/reverse repo operation at a variable rate and undertaken to colloborate with the cash reserve ratio (CRR) maintenance cycle.

iii.RBI has permitted standalone primary dealers (SPDs) to participate directly in all overnight liquidity management operations.

Repos worth Rs 1 lakh cr to help better monetary transmission: RBI
As per the RBI Governor Shaktikanta Das , RBI’s decision to conduct new one-year and three-year repos worth Rs 1 lakh crore from the fortnight beginning on February 15,2020  is aimed to ensure better monetary policy transmission that in turn will enable banks to reduce their lending rates.

i.The RBI has reduced the repo rate by 135 basis since February 2019 to a 9-year low of 5.15 %.

RBI announces incentives for loans to home, auto and MSME sector
The Reserve Bank has relaxed banks in calculating total deposits by changing the cash reserve ratio (CRR) maintenance rules to increase the flow of credit to the vehicle and housing sector with micro, small and medium enterprises (MSME).

i.This move will increase the loans of banks to these targeted areas as they will get a relaxation in the CRR on the increased loans. This rebate facility will be available till July 2020.

ii.CRR:It is the percentage of total deposits that banks mandatorily park with the apex bank. At present it is 4%  of the total deposits of banks.

iii.The facility will be available on the extended loan till the fortnight ending July 31, 2020.

RBI announces great relief for real estate sector
In order to give a boost to the real estate sector, the Reserve Bank has also extended the Date for commencement of commercial operations (DCCO) of project loans for the commercial real estate sector. This facility will be available in cases where the delay in the project is not caused by the promoters. This feature is extended for one year without reducing the asset classification.

RBI to create digital payments index (DPI)
The Reserve Bank has announced the creation of  Digital Payments Index (DPI) to assess and capture the extent of digitalisation of payments in better manner.
The DPI, based on multiple parameters ,will be made available after July 2020.

i.In order to promote digital payments the FM (Finance Ministry) announced that no MDR (merchant discount rate) charges will be applicable on transactions/ payments done via RuPay and UPI (Unified Payments Interface) platforms beginning January 1, 2020.

ii.MDR: It is the is the rate charged to a merchant for payment processing services on debit and credit card transactions.

RBI proposes Self-Regulatory Organization for digital payment system
The Reserve Bank has proposed to create a Self Regulatory Organization (SRO) by April 2020 to protect customers and costs related to digital payments.

i.The SRO will work as a 2-way communication channel between the players and the regulator/supervisor.

ii.According to the RBI, these SRO are expected to have a smooth growth in view of the good growth of digital payments and the growing maturity of units linked to the payment ecosystem so that these units can operate smoothly in the payment system.

Check truncation system (CTS) will work across the country from Sept 2020 :RBI
In order to increase the speed of check clearance, the Reserve Bank has decided to introduce Check Truncation System (CTS) across the country from September 2020.RBI brought this system in the year 2010. It is currently operational in major clearing houses.

i.CTS will make it much easier for customers to clear their checks and it will also save a lot of time.

ii.About CTS:It is a cheque clearing system undertaken by the Reserve Bank of India (RBI) for quicker cheque clearance

Key takeaways:

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

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

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

iv.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.

v.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.

vi.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.

About Reserve Bank of India (RBI):
Headquarters
– Mumbai, Maharashtra
Formation– 1 April 1935
Deputy Governors– 4 (BP Kanungo, N S Vishwanathan, Mahesh Kumar Jain, Michael Debabrata Patra)