MPC meet: Tweaking at the margins

It comes as no surprise that the Monetary Policy Committee, on Thursday, decided to hold the repo rate at 5.15 per cent. The prospect of retail inflation being at 6.5 per cent in the January–March quarter, along with an elevated fiscal deficit, would have restrained the MPC’s hand. Being committed to an accommodative stance, the MPC has indicated that it will use other instruments in its toolkit to keep market interest rates down, lowering the cost of funds for banks. Hence, in a sequel to its ‘operation twist’ exercise, meant to reduce long-term bond market yields, the RBI has decided to begin term repo lending for one year and three year periods. It has also removed the cap on repo borrowings by banks at 1 per cent of their Net Demand and Time Liabilities. These moves are expected to ensure better monetary transmission. In another move to break the climate of risk aversion, the window for one-time restructuring for MSME loans has been extended till December 31 this year, against March so far. This will help a swathe of units hit by poor liquidity in the wake of the economic slowdown and the implosion of the NBFC space.

The helping hand to MSMEs also comes in the form of a relaxation in the cash reserve ratio requirement with respect to lending to this sector. This facility has also been extended to auto and residential housing. The commercial housing sector has been allowed more time to complete its projects, in effort getting a lease of credit, in the event of ‘delays beyond its control’ — a rather lenient norm. For banks, it will release funds locked up in zero interest CRR vaults; the issue is whether these funds find their way into the economy or in higher interest yielding instruments. Lending, now at multi-year lows, will improve when investment and consumer confidence look up (of which there is little indication in the latest RBI surveys), and the managerial ecosystem within banks changes. A moot point here is whether sectoral-specific issues should form part of the monetary policy review, or be dealt by a department of the RBI. The use of CRR relaxation as a means to spur lending, as against reducing provisioning limits or increasing banks’ capital to achieve the same objectives can be debated; however, a CRR relaxation can be more easily reversed.

The RBI, however, needs to come to grips with managing its foreign exchange inflows, which have contributed to a liquidity surplus. The RBI has been absorbing some of it to keep exchange rate appreciation in check, which complicates the management of bond markets. It is to be hoped that measures to cool bond markets in a moderate inflationary scenario will keep short-term portfolio flows in check. The MPC-RBI should address these ambiguities, going forward.

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