With inflationary pressures preventing it from cutting the policy repo rate, the Reserve Bank of India on Thursday turned to other policy measures to boost bank lending and support the flagging economic growth.
Even as it kept the policy repo rate unchanged at 5.15 per cent, the RBI assured stakeholders that policy space is available for future action. It also decided to continue with the accommodative Monetary Policy stance as long as necessary to revive growth, while ensuring that inflation remains within target.
Policy measures
To augment credit flow to productive sectors and support growth, which slipped to 4.5 per cent in the second quarter, the RBI unveiled a long-term repo operation (LTRO) facility.
By conducting LTRO of one and three years duration at the policy repo rate, the central bank is seeking to ensure that banks can access durable liquidity aggregating up to ₹1-lakh crore at a reasonable cost. With this, the RBI expects its repo rate cuts to translate into lower bank lending rates (better monetary transmission).
In addition, the RBI will allow scheduled commercial banks to deduct the equivalent of incremental credit disbursed by them to specific sectors (retail loans for automobiles, residential housing and loans to micro, small and medium enterprises) as at fortnight ended January 31, 2020 from their deposits for maintenance of the cash reserve ratio (CRR).
This exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020. CRR is the slice of deposits that banks have to park with the RBI. It is currently at 4 per cent of their deposits.
So, if banks do more fresh lending to the specified sectors, the CRR maintenance requirement will be less to that extent. Banks are better off lending and earning interest than earning nothing on their CRR balances. The RBI also unveiled a revised liquidity management framework so that it is equipped with the required tools to inject and absorb liquidity at either fixed or variable rates, on an overnight basis as well as for longer tenors.
Explaining the decision to hold rates, RBI Governor Shaktikanta Das said: “While this decision may be on expected lines and perhaps widely discounted, it is important not to discount the RBI! It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges that the Indian economy currently faces in terms of the sluggishness in the growth momentum.”
Das underscored that the path of inflation is elevated and on a rising trajectory through the January-March quarter, pegged at 6.5 per cent. On the other hand, economic activity continues to be subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner.
Evolving growth inflation dynamics
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