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Following the Union Budget that has assumed the burden of pulling up the economy, the Reserve Bank of India’s Monetary Policy Committee on Friday voted unanimously to hold the policy repo rate at 4 per cent, and take the first steps to roll back some of its Covid-time measures.
After a year of shouldering the burden of kickstarting growth, the central bank is now moving to a supportive role by promising an accommodative stance for as long as necessary, and ensuring ample liquiidity to sustain the recovery.
Balancing act
The RBI has been doing a fine balancing act between supporting growth, which is recovering from the impact of the pandemic, and tackling core inflation (retail inflation excluding food and fuel) pressures.
“Given that inflation has returned within the tolerance band (of 4 per cent +/- 2 per cent), the MPC judged that the need of the hour is to continue to support growth, assuage the impact of Covid-19 and return the economy to a higher growth trajectory,” said RBI Governor Shaktikanta Das.
As the first step to rolback Covid-time measures, the RBI, on a review of monetary and liquidity conditions, decided to gradually restore the cash reserve ratio (CRR).
This will be in two phases in a non-disruptive manner — to 3.5 per cent of deposits effective from March 27, and 4 per cent from May 22. Das emphasised that systemic liquidity would continue to remain comfortable over the ensuing year. The CRR normalisation opens up space for a variety of market operations of the RBI to inject additional liquidity, he added.
To help banks tide over the disruption caused by Covid-19, the CRR was reduced from 4 per cent to 3 per cent of their deposits for a year, effective from the reporting fortnight beginning March 28, 2020.
The RBI tried to soften the possible impact of the restoration in CRR by announcing continuation of the relaxation in the marginal standing facility for six more months — up to September 30, 2021.
This will provide comfort to banks (to the extent of ₹1.53-lakh crore) on their liquidity requirements.
Govt borrowing
The RBI decided to extend the dispensation of parking Government Securities (G-Secs) and State Development Loans (SDLs), acquired between April 1, 2021 and March 31, 2022, in the enhanced HTM (held to maturity) investment bucket up to March 31, 2023.
The benefit of this enhanced HTM limit, whereby banks can park G-Secs and SDLs equal to 22 per cent of their deposits, is that they need not provide for investment depreciation.
This will provide certainty to the market participants in the context of the borrowing programme of the Centre and the States for 2021-22, the RBI said. The HTM limits would be restored to 19.5 per cent in a phased manner starting from the quarter ending June 30, 2023.
Another significant measure to support the government borrowing programme is that retail investors will be allowed to open Gilt Accounts with the RBI. This will provide retail investors online access to the government securities market, both primary and secondary, along with the facility to open their Gilt securities account (‘Retail Direct’) with the RBI.
The RBI revised its projection for retail inflation to 5.2 per cent in the fourth quarter of FY21 (earlier projection: 5.8 per cent), 5.2 per cent to 5 per cent in first half of FY22 (5.2 per cent to 4.6 per cent) and 4.3 per cent in the third quarter of FY22, with risks broadly balanced. The central bank projected real GDP growth at 10.5 per cent in FY22 — in the range of 26.2 per cent to 8.3 per cent in H1 (earlier projection: 21.9 per cent to 6.5 per cent) and 6 per cent in Q3.
Dinesh Kumar Khara, Chairman, State Bank of India, observed that the RBI policy announcement is an acknowledgement and continuation of doing whatever it takes to maintain an orderly, seamless and non-disruptive liquidity management policy to support debt management.
The G-Sec market, however, didn’t seem impressed with the liquidity and regulatory measures. Yield on the 10-year benchmark G-Sec, carrying 5.77 per cent coupon rate, edged up about three basis points to close at 6.1283 per cent and its price declined about 23 paise to ₹97.45.
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