Tag: RBi policy

A defining moment for RBI monetary policy

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The monetary policy committee (MPC) will almost certainly hold the repo rate unchanged in the current meeting. Nevertheless, there are a number of areas of interest to watch out for. These include the roadmap for absorbing the prevailing large systemic liquidity surplus; the quantum of government securities acquisition programme (GSAP) in the coming months, possible announcements related to variable rate reverse repos (VRRR), and finally whether the central bank will decide to reduce the width of the policy rate corridor from the current 65 basis points (bps) by raising the reverse repo rate.

Fresh global uncertainties

Monetary policy is facing fresh challenges of late across the globe. On the one hand, sharp, unexpected headwinds like major disruptions in supply of industrial raw materials, fuel and energy in a number of leading economies in recent months has emerged as a key risk to the pace of near term economic recovery. On the other hand, commodity price inflation led by Covid-induced supply disruptions – which was believed to be ‘transient’ for several months – seems to be spilling over to a wider set of goods and services.

Such developments on the growth-inflation front mean additional uncertainty as regards the start-date, nature and pace of reversal of central banks’ excessive policy accommodation, which is widely believed to be round the corner. Volatility in financial markets have inched higher, with the volatility index (VIX) averaging nearly 20 in September, as against about 17.5 in August. Bond yields have also moved higher by 15-30 bps across a number of advanced economies during September.

Growth inflation projections

In India, the macro backdrop is a mixed bag. Improvement in the Covid scenario since June has been quicker than expected, leading to sharp easing in mobility and logistics-related bottlenecks. The GDP print (~20 percent growth year-on-year) for the quarter ending June had broadly been on expected lines, benefiting heavily from an abysmally low base.

High-frequency indicators suggest that economic activity continues to improve during the following quarter as well, but not in tandem with the strength of the upside surprise as regards the Covid scenario. Also, recovery in business and consumer confidence will likely be a gradual process only. As per the RBI’s own survey, urban consumer confidence virtually did not improve since the multi-year lows of 2020. Overall, while uptick in recent high frequency indicators may provide greater comfort, we expect the MPC to maintain their 2021-22 growth forecast of 9.5 percent in the current meeting.

On the inflation front, CPI prints during July and August – that averaged below 5.5 percent, nearly 1 percentage point lower than during May and June – clearly offered a bit of immediate breathing space for the MPC. The RBI’s existing inflation projection of 5.9 percent for the quarter ending September looks set to be undershot. However, a large number of fresh uncertainties, which include rising commodity prices (eg., energy, food, metals), elevated energy prices at home, and patches of unseasonal rains closer to the harvest season for the summer crop, are bound to raise concerns for the MPC. Overall, despite the relief from the most recent prints, the MPC will possibly retain its CPI forecast of 5.7 percent for 2021-22 in the October meeting, even if they acknowledge a number of risks on both sides.

A nuanced approach

Overall, the growth inflation backdrop is clearly more complicated for the MPC in the current meeting than in recent months. Risks on the inflation front are large, multi-dimensional, and largely beyond the direct influence of monetary policy in the near term. Policy choices in the coming months will possibly serve as defining moments and important precedence for monetary policy. Importantly, one of the MPC members has already voted against the accommodative stance.

Nevertheless, the decision to withdraw crisis-time policy support has to be nuanced and gradual, even if erring on the side of caution, rather than a source of surprise in the current nascent and uneven nature of recovery. The MPC has rightly shown a dovish bias in the recent past and has indicated repeatedly that they will remain data-dependent. Importantly, while a likely near-double digit growth in 2021-22 would mean a strong uptick optically, India’s GDP is virtually in the middle of a phase of zero growth over a two-year period. Also, it is felt – as suggests a recent IMF report – that the Covid pandemic might cause a larger dent in India’s long-term growth prospects than most peers.

Finally, RBI’s rate cuts in 2020 had been more nuanced compared with several peers, thereby, cushioning the MPC from embracing the hiking cycle in a hurry.
Against that backdrop, guidance, if any, from the RBI as regards absorbing part of the crisis-time liquidity support will be important.

Lowering the quantum of GSAP and/or further VRRR auctions are possibilities. Also, an early step towards policy normalization might be normalization of the policy rate corridor from the current, wider-than-usual 65 bps. This may in fact be triggered in one of the MPC meetings fairly soon. However, with the help of continuous and effective communication from the central bank during and outside the MPC meetings, market participants have prepared for this to an extent; with a relatively limited surprise element, such moves should not cause any material disruption.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

The Week Ahead: RBI policy, services data, OPEC meet likely to impact market

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Indian benchmark indices retreated more than two percent from recent peaks dragged by IT and select financial stocks amid fluctuations in global markets. The Sensex index shed nearly 1,650 points from an all-time high atop Mount 16,000 last week.

ALSO READ: Sensex tumbles 2% in worst week for IT gauge in 8 months; PSU banks jump | Stocks that moved the most

Dalal Street week ahead

This week, analysts will closely track the outcome of the Monetary Policy Committee’s bi-monthly policy review and the onset of financial results for the quarter ended September 30. The reading of a private survey on India’s services sector will be watched. A meeting of the group of top oil producers known as OPEC Plus (the Organization of the Petroleum Exporting Countries) will also be on their radar.

“The central bank is expected to maintain its accommodative stance to maintain adequate liquidity in the system and to support economic activity,” said Vinod Nair, Head of Research at Geojit Financial Services.

Traders should expect an action-packed week ahead.

“Given that economic activity has not yet returned to pre-pandemic levels, the RBI is unlikely to remove the economy’s training wheels. Any deviation from this stance, however, may result in whipsaw movements… Market participants should brace for greater volatility in crude oil prices,” said brokerage Samco. 

ALSO READ: Top D-Street winners & losers last week

Technical outlook

Nifty, though moving around its short-term averages, is still outperforming its global peers and looks overbought in the short term, according to Samco. “A further slight correction up to 17,250-17,200 levels cannot be ruled out. Traders are suggested to again take a ‘buy on dips’ approach as the positional outlook still remains bullish as long as the index does not break below 17,000,” it said.

Here are the key factors and events that are likely to influence Dalal Street in the week starting October 4:

DOMESTIC CUES

RBI policy

The central bank’s six-member Monetary Policy Committee will release its statement after a three-day meeting that ends on October 8.

GLOBAL CUES

OPEC meeting

The OPEC Plus group meets on Monday to review the output policy. On Friday, crude oil rose above $78 a barrel near a three-year high on expectations OPEC ministers will maintain a steady pace in raising supply. In July, the group agreed to boost output by 4 lakh bpd a month.

US infra package

CORPORATE ACTION

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Citi expects 15 bps reverse repo hike in October 8 RBI monetary policy

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Citi on Thursday said that it is expecting 15 basis points (bps) reverse repo hike in the Reserve Bank of India’s monetary policy to be held on October 8. Accordingly, the reverse repo will be upped to 3.5 percent from the current 3.35 percent, Citi said.

Advancing its reverse repo forecast hike to October from December, Citi said that increasing size and cut-off rates of recent variable rate repo (VRRR) auctions might have indicated RBI’s willing to normalize the liquidity management “operations” earlier than expected.

“Hence, we shift our 15 bps reverse repo hike forecast to the October policy from December earlier. That said, MPC would try to differentiate between these “operational changes” and monetary policy’s continued growth bias for an extended period of time,” it added.

RBI raised the cut-off in the latest 7-day VRRR to 3.89 percent.

The central bank had on August 6 kept interest rates unchanged at a record low as it chose to support economic revival over inflation. The six-member Monetary Policy Committee (MPC) voted in favour of retaining the main repurchase rate at 4 percent but was split on continuing with the lower-for-longer stance.

The RBI had last revised its policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low. This was the seventh straight meeting when it maintained the status quo.

Meanwhile, the apex bank’s former deputy governor R Gandhi recently claimed that the Reserve Bank of India (RBI) is expected to continue with its current accommodative stance to maintain sufficient liquidity in the system and monetary policy tightening is several quarters away as the economic revival has not reached the pre-Covid level,  He said the low-interest rate regime will continue to support the economic activities.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

RBI policy: An adroit balancing act

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The RBI policy is as status quo as it can possibly get: it has kept rates on hold and maintained its stance. Not a word in the stance has changed: “The MPC also decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.”

Yet yields moved up by 3-4 basis points. The market’s initial reaction was that the policy is probably slightly less dovish: after all the inflation forecast for the current year has been raised to 5.7 percent from 5.1 percent. The market expected it to be raised only to 5.5 percent. Also even in Q1 of next year, RBI expects inflation to be 5.1 percent ( ie over and above a 5.6 percent in Q1 this year). So RBI itself sees some permanent element of inflation, that will keep CPI well over the MPC’s 4 percent target.

Two counters to this: 1. By accepting CPI can average 5.7 percent, RBI has given itself elbow room. Even if CPI surprises on the upside it wont have to act hurriedly in coming months. As for the medium-term deputy gov Michael Patra’s point is well taken: the RBI’s effort has been to bring down the inflation from an average 6.2 percent in FY20 ( excusable in an extraordinary year) to 5.7 percent in the current year and 5.1 percent next year. The “glide path” is towards 4 percent, he pointed out.

Versus the hawkishness of the inflation forecast, the growth forecast can be read as slightly dovish. Although the growth forecast for Q1 has been raised from 18.5 percent to 21.4 percent,the forecasts for the remaining quarters has been lowered. This too moderates the hawkishness of the messaging.

Liquidity: Balanced Pay

Increasing the amount of liquidity that RBI will drain out through the variable rate reverse repo should also not be seen as hawkish, as the governor was at pains to explain. This draining actually helps the RBI buy more government bonds and hence keep yields under check. That’s dovish for markets.

Some experts have been worrying that the RBI is being too complacent on inflation, and is perhaps behind the curve. To quell this charge,, and to perhaps represent the dissenting view of MPC member Jayanth Verma, RBI has paid its lip service to its inflation-targeting mandate. Savour this line: “Inflationary pressures are being closely and continuously monitored. The MPC is conscious of its objective of anchoring inflation expectations”.

But there is an immediate strong dovish counter: “ The outlook for aggregate demand is improving, but still weak and overcast by the pandemic. There is a large amount of slack in the economy, with output below its pre-pandemic level. The current assessment is that the inflationary pressures during Q1:2021-22 are largely driven by adverse supply shocks which are expected to be transitory….The nascent and hesitant recovery needs to be nurtured through fiscal, monetary and sectoral policy levers”.

Some have charged the RBI with ignoring the victims of deeply negative real rates for so long. It’s a fair charge. But others argue RBI can afford to give growth a more than fair chance since we are secure on the external front given large reserves and a benign Fed. We will know if RBI is behind the curve only much after the event.

For now, it has to be admitted that RBI has adroitly balanced between the risks of higher-than-desirable inflation and lower-than-desirable growth. The word play and the use of instruments – VRRR and GSAP – is as balanced as it can possibly get. If a third surge of COVID gets nasty, RBI can nimbly jump to help growth by increasing liquidity and if inflation gets nasty it can start draining more liquidity more rapidly.

All told, RBI gets a AAA for saying a lot and upsetting nothing.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

RBI Policy: Rate cut on housing loans augurs well for economy, interest rate transmission has improved, says Guv

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The significant reduction in lending rate on personal housing and commercial real estate sector augurs well for the economy, as these segments are also employment-intensive, RBI Governor Shaktikanta Das said on Friday. While announcing the third bi-monthly monetary policy review, he said, the interest rate transmission has improved.

“The efficacy of RBI’s monetary policy measures and actions is reflected in the significant improvement in transmission during the current easing cycle. The reduction in repo rate by 250 basis points since February 2019, has resulted in a cumulative decline by 217 basis points in the weighted average lending rate (WALR) on fresh rupee loans,” he said. The Governor also said that the reduction in lending rate has reduced the burden on households.

“Domestic borrowing costs have eased, including interest rates on market instruments like corporate bonds, debentures, CPs, CDs and T-bills. In the credit market, transmission to lending rates has been stronger for MSMEs, housing and large industries. The low interest rate regime has also helped the household sector reduce the burden of loan servicing,” he said.

The significant reduction in interest rates on personal housing loans and loans to the commercial real estate sector augurs well for the economy, as these sectors have extensive backward and forward linkages and are employment-intensive, he added.

With regard to the shift from LIBOR as a benchmark for export credit, the Governor said the transition away from London Interbank Offered Rate (LIBOR) is a significant event that poses certain challenges for banks and the financial system.

The Reserve Bank has been engaging with banks and market bodies to proactively take steps and the central bank has also issued advisories to ensure a smooth transition for regulated entities and financial markets. In this context, it has been decided to amend the guidelines related to export credit in foreign currency and restructuring of derivative contracts, he said.

“Banks will be permitted to extend export credit in foreign currency using any other widely accepted Alternative Reference Rate in the currency concerned. Since the change in reference rate from LIBOR is a “force majeure” event, banks are also being advised that change in reference rate from LIBOR/ LIBOR related benchmarks to an Alternative Reference Rate will not be treated as restructuring,” he said.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

RBI defers target date for meeting thresholds under COVID debt recast scheme by 6 months

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In further relief to the stressed corporate sector, the RBI on Friday decided to defer the target date by six months to October 1, 2022, for meeting certain operational thresholds outlined by the KV Kamath committee under the COVID-19 debt-recast scheme announced last year. Kamath Committee on September 4, 2020, had recommended financial parameters to be factored in the resolution plans under the ‘Resolution Framework for COVID-19-related Stress’ along with sector-specific benchmark ranges for such parameters.

The committee had recommended financial ratios for 26 sectors which has to be factored in by lending institutions while finalizing a resolution plan for a borrower. The financial aspects include those related to leverage, liquidity, debt serviceability. The resolution plans implemented under the Resolution Framework for COVID-19-related stress announced on August 6, 2020, require sector-specific thresholds to be met in respect of certain financial parameters.

Also Read: RBI extends marginal standing facility relaxation till December 31

“Of these parameters, the thresholds in respect of four parameters relate to the operational performance of the borrowing entities, viz. Total Debt to EBIDTA ratio, Current Ratio, Debt Service Coverage Ratio and Average Debt Service Coverage Ratio,” RBI Governor Shaktikanta Das said while announcing the third bi-monthly monetary policy review. These ratios are required to be met by March 31, 2022.

“Recognizing the adverse impact of the second wave of COVID-19 and the resultant difficulties on the revival of businesses and in meeting the operational parameters, it has been decided to defer the target date for meeting the specified thresholds in respect of the above four parameters to October 1, 2022,” he said.

Also Read: RBI to extend on-tap TLTRO scheme by 3 months to December 31

The 26 sectors specified by the Reserve Bank of India (RBI) include automobiles, power, tourism, cement, chemicals, gems and jewellery, logistics, mining, manufacturing, real estate, and shipping among others.

Click here for live updates on RBI’s 3rd bi-monthly policy meet.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

RBI Policy: Here’s the full text of Governor Shaktikanta Das’ statement

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Friday decided to keep the benchmark interest rate unchanged at 4 percent but maintained an accommodative stance as the economy is yet to recover from the impact of the second COVID wave.

This is the seventh time in a row that the Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das has maintained the status quo. RBI had last revised its policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.

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Here’s the full text:

The Monetary Policy Committee (MPC) met on 4th, 5th and 6th August 2021. Based on an assessment of the evolving domestic and global macroeconomic and financial conditions and the outlook, the MPC voted unanimously to keep the policy repo rate unchanged at 4 per cent. The MPC also decided on a 5 to 1 majority to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target, going forward. The marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25 per cent. The reverse repo rate also remains unchanged at 3.35 per cent.

2. Today, we are in a much better position than at the time of the MPC’s meeting in June 2021. As the second wave of the pandemic ebbs, containment eases and we slowly build back, vaccine manufacturing and administration are steadily rising. Yet the need of the hour is not to drop our guard and to remain vigilant against any possibility of a third wave, especially in the background of rising infections in certain parts of the country.

3. Our actions, together with those of the Government, are aimed at alleviating distress and prioritising growth, while keeping the financial system healthy and stable. Our approach can be best described by weaving together two quotes from Martin Luther King Jr1 “But I know, somehow, that only when it is dark enough can you see the stars. Keep moving. Let nothing slow you up. Move on …..”

4. Let me begin by setting out the rationale underlying the MPC’s decision. The MPC met in the shadow of the two recent inflation prints being above the upper tolerance band of the inflation target. It noted that economic activity has broadly evolved on the lines of the MPC’s expectations in June and the economy is recovering from the setback of the second wave. The monsoon has revived after a brief hiatus and kharif sowing is gaining momentum. Some high frequency indicators are also looking up again during June-July. Our expectation is that activity is likely to gather pace with progressive upscaling of vaccinations, continued large policy support, buoyant exports, better adaptations to COVID-related protocols, and benign monetary and financial conditions.

5. Consumer price inflation surprised on the upside in May, reflecting a combination of adverse supply shocks, elevated logistics costs, high global commodity prices and domestic fuel taxes. In June, headline inflation remained above the upper tolerance level, but price momentum moderated. Also, core inflation

1Source: Speeches delivered at Bishop Charles Mason Temple in Memphis, Tennessee (3 April 1968) and at Prayer Pilgrimage for Freedom (Call to Conscience, 1957) in Washington, D.C USA.

softened from its peak in May. International crude oil prices remain volatile; any moderation in prices as a consequence of the OPEC plus agreement could contribute towards alleviating inflation pressures.

6. On balance, the outlook for aggregate demand is improving, but the underlying conditions are still weak. Aggregate supply is also lagging below pre-pandemic levels. While several steps have been taken to ease supply constraints, more needs to be done to restore supply-demand balance in a number of sectors of the economy. The recent inflationary pressures are evoking concerns; but the current assessment is that these pressures are transitory and largely driven by adverse supply side factors. We are in the midst of an extraordinary situation arising from the pandemic. The conduct of monetary policy during the pandemic has been geared to maintain congenial financial conditions that nurture and rejuvenate growth. At this stage, therefore, continued policy support from all sides – fiscal, monetary and sectoral – is required to nurture the nascent and hesitant recovery. The MPC continues to be conscious of its mandate of anchoring inflation expectations as soon as the prospects for strong and sustainable growth are assured. Accordingly, the MPC decided to retain the prevailing repo rate at 4 per cent and continue with the accommodative stance with all its nuances.

Assessment of Growth and Inflation Domestic Growth
7. Domestic economic activity has started normalising with the ebbing of the second wave of the virus and the phased reopening of the economy. High-frequency indicators suggest that (i) consumption (both private and Government), (ii) investment and (iii) external demand are all on the path of regaining traction. Let me elaborate on each of these three aspects. Further easing of restrictions and increasing coverage of vaccinations are likely to boost private spending on goods and services including travel, tourism and recreational activities, propelling a broad-based recovery in aggregate demand. The robust outlook for agriculture and rural demand would continue to support private consumption. Urban demand is likely to accelerate with recovery in manufacturing and non-contact intensive services, release of pent-up demand and the pace of vaccination. This is corroborated by encouraging movements in several high frequency indicators, viz., registration of automobiles, electricity consumption, non-oil non-gold imports, consumer durable sales and hiring of urban workers. The results of the July round of the Reserve Bank’s consumer confidence survey suggest that one year ahead sentiments returned to optimistic territory from historic lows. Early results from listed firms show that corporates have been able to maintain their healthy growth in sales, wage growth and profitability, led by information technology firms. This will also support aggregate disposable income of consumers.

8. Although investment demand is still anaemic, improving capacity utilisation, rising steel consumption, higher imports of capital goods, congenial monetary and financial conditions and the economic packages announced by the Central Government are expected to kick-start a long-awaited revival. Firms polled in the Reserve Bank’s surveys expect expansion in production volumes and new orders in Q2:2021-22 which would sustain through Q4:2021-22, boding well for investment. Innovation and working models adopted during the pandemic by businesses will continue to reap efficiency and productivity gains even after the pandemic recedes. This should help trigger a virtuous cycle of investment, employment and growth.

9. External demand remained buoyant during Q1:2021-22 and was reflected in increasing exports, lending critical support to aggregate demand. Strong external demand is an opportunity for India and further policy support should help in capitalising on this. Global commodity prices and episodes of financial market volatility, together with vulnerability to new waves of infections are, however, downside risks to economic activity. Taking all these factors into consideration, projection of real GDP growth is retained at 9.5 per cent in 2021-22 consisting of 21.4 per cent in Q1; 7.3 per cent in Q2; 6.3 per cent in Q3; and 6.1 per cent in Q4 of 2021-22. Real GDP growth for Q1:2022-23 is projected at 17.2 percent.

Inflation

10. Headline CPI inflation edged up sharply to 6.3 per cent in May driven by a broad-based pick-up across all major groups on adverse supply shocks, sector- specific demand-supply mismatches and spillovers from rising global commodity prices. It remained at 6.3 per cent in June; however, core inflation registered an appreciable moderation.

11. The revival of the south-west monsoon and pick up in kharif sowing, buffered by adequate food stocks should help in containing cereal price pressures in the months ahead. High frequency food price indicators show some moderation in prices of edible oils and pulses in July on the back of supply side interventions by the government. Inflation in core services like house rentals remains below historical averages, reflecting subdued demand conditions. Crude oil prices are volatile with implications for imported cost pressures on inflation. The combination of elevated prices of industrial raw materials, high pump prices of petrol and diesel with their second-round effects, and logistics costs continue to impinge adversely on cost conditions for manufacturing and services, although weak demand conditions are tempering the pass-through to output prices and core inflation.

12. Before the onset of the pandemic, headline inflation and inflationary expectations were well anchored at 4 per cent, the gains from which need to be consolidated and preserved. Stability in inflation rate fosters credibility of the monetary policy framework and augurs well for anchoring inflation expectations. This, in turn, reduces uncertainty for investors, reduces term and risk premia, increases external competitiveness and, thus, is growth-promoting. Since the start of the pandemic, the MPC has prioritised revival of growth to mitigate the impact of the pandemic. The available data point to exogenous and largely temporary supply shocks driving the inflation process, validating the MPC’s decision to look through it. The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy. A pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions.

13. Inflation may remain close to the upper tolerance band up to Q2:2021-22, but these pressures should ebb in Q3:2021-22 on account of kharif harvest arrivals and as supply side measures take effect. Taking into consideration all these factors, CPI inflation is now projected at 5.7 per cent during 2021-22: 5.9 per cent in Q2; 5.3 per cent in Q3; and 5.8 per cent in Q4 of 2021-22, with risks broadly balanced. CPI inflation for Q1:2022-23 is projected at 5.1 per cent.

Liquidity and Financial Market Conditions

14. During June-July, global financial markets turned volatile in response to higher inflation numbers in several countries and the fear of early policy normalisation with skewed economic recovery in some advanced countries. These developments need to be factored into our policy matrix for framing an appropriate response, given that safeguarding the economy from the vicissitudes of global spillovers and ensuring financial stability remain a top priority for the Reserve Bank. Nonetheless, domestic macroeconomic situation and the evolving growth inflation dynamics will continue to be the principal pivot of our monetary policy actions.

15. The Reserve Bank through its market operations, both conventional and unconventional, has maintained ample surplus liquidity since the onset of the pandemic to ensure easing of financial conditions in support of domestic demand. Buoyed by the renewed vigour of capital inflows and the Reserve Bank’s purchase of government securities in the secondary market, total absorption through reverse repos surged from a daily average of ₹5.7 lakh crore in June to ₹6.8 lakh crore in July 2021 and further to ₹8.5 lakh crore in August 2021 so far (up to August 4).

16. Under the revised liquidity management framework announced on February 06, 2020, the Reserve Bank has been conducting 14-day variable rate reverse repo (VRRR) auctions as its main liquidity operation. With the commencement of normal liquidity operations, the VRRR, which was temporarily held in abeyance during the pandemic, has been re-introduced since January 15, 2021 and the initial absorption of ₹2 lakh crore has been rolled over in the subsequent fortnightly auctions. In parallel, access to the fixed rate overnight reverse repo has been kept open. Markets have adapted and even welcomed the VRRR in view of the higher remuneration it offers relative to the fixed rate overnight reverse repo. Fears that the recommencement of the VRRR tantamounts to liquidity tightening have been allayed. We have seen higher appetite for VRRR in terms of the bid-cover ratio in the auctions. Considering all these aspects, it has now been decided to conduct fortnightly VRRR auctions of ₹2.5 lakh crore on August 13, 2021; ₹3.0 lakh crore on August 27, 2021; ₹3.5 lakh crore on September 9, 2021; and ₹4.0 lakh crore on September 24, 2021. These enhanced VRRR auctions should not be misread as a reversal of the accommodative policy stance, as the amount absorbed under the fixed rate reverse repo is expected to remain more than ₹4.0 lakh crore at end- September 2021. Needless to add that the amount accepted under the VRRR window forms part of system liquidity.

17. The Reserve Bank’s secondary market G-sec acquisition programme (G-SAP) has been successful in anchoring yield expectations while eliciting keen response from market participants. We propose to conduct two more auctions of ₹25,000 crore each on August 12 and August 26, 2021 under G-SAP 2.0. We will continue to undertake these auctions and other operations like open market operations (OMOs) and operation twist (OT), among others, and calibrate them in line with the evolving macroeconomic and financial conditions.

18. It is necessary to have active trading in all segments of the yield curve for its orderly evolution. Our recent G-SAP auctions that have focussed on securities across the maturity spectrum are intended to ensure that all segments of the yield curve remain liquid. Furthermore, our options are always open to include both off the run and on the run securities in the G-SAP auctions and operation twist. It is expected that the secondary market volumes would pick up and market participants take positions that lead to two-way movements in yields.

19. Our endeavour as the debt manager of both Central and state Governments has been to ensure an orderly completion of their borrowing programmes at a reasonable cost while minimising rollover risk. In my earlier statements, I have emphasised orderly evolution of the yield curve as a public good in which both market participants and the Reserve Bank have a shared responsibility. As G-sec yields serve as a benchmark and have a high signalling value for other segments of the debt market, guidance on orderly path of yields was provided through auction cut- offs, devolvements, cancellations and exercise of green shoe options in primary market operations. The introduction of uniform price auctions announced recently for issuance of securities up to 14 years tenor is expected to mitigate risks that bidders may face in the primary segment. The decision of the Government to accommodate the GST compensation payment to states for the first half of the year within the existing cash balances should assuage market concerns on the size of Government’s borrowing programme this year.

20. The efficacy of RBI’s monetary policy measures and actions is reflected in the significant improvement in transmission during the current easing cycle. The reduction in repo rate by 250 basis points since February 2019 has resulted in a cumulative decline by 217 basis points in the weighted average lending rate (WALR) on fresh rupee loans. Domestic borrowing costs have eased, including interest rates on market instruments like corporates bonds, debentures, CPs, CDs and T-bills. In the credit market, transmission to lending rates has been stronger for MSMEs, housing and large industries. The low interest rate regime has also helped the household sector reduce the burden of loan servicing. The significant reduction in interest rates on personal housing loans and loans to commercial real estate sector augurs well for the economy, as these sectors have extensive backward and forward linkages and are employment intensive.

Additional Measures

21. After the onset of the pandemic, the Reserve Bank has announced more than
100 measures to mitigate its impact. Going forward, our endeavour would be to continue the monitoring of measures which are still in operation to ensure that the benefit of all our measures percolate down to targeted stakeholders. Against this backdrop and based on our continuing assessment of the macroeconomic situation and financial market conditions, certain additional measures are being announced today. The details of these measures are set out in the statement on developmental and regulatory policies (Part-B) of the Monetary Policy Statement. Let me outline these measures.

On-tap TLTRO Scheme: Extension of Deadline

22. The scope of the on-tap TLTRO scheme, initially announced on October 9, 2020 for five sectors, was further extended to stressed sectors identified by the Kamath Committee in December 2020 and bank lending to NBFCs in February 2021. The operating period of the scheme was also extended in phases till September 30, 2021. Given the nascent and fragile economic recovery, it has now been decided to extend the on-tap TLTRO scheme further by a period of three months, i.e. till December 31, 2021.

Marginal Standing Facility (MSF): Extension in Period of Relaxation

23. On March 27, 2020, banks were allowed to avail of funds under the marginal standing facility (MSF) by dipping into the Statutory Liquidity Ratio (SLR) up to an additional one per cent of net demand and time liabilities (NDTL), i.e., cumulatively up to 3 per cent of NDTL. To provide comfort to banks on their liquidity requirements, including meeting their Liquidity Coverage Ratio (LCR) requirement, this relaxation which is currently available till September 30, 2021 is being extended for a further period of three months, i.e., up to December 31, 2021. This dispensation provides increased access to funds to the extent of ₹1.62 lakh crore and qualifies as high- quality liquid assets (HQLA) for the LCR.

LIBOR Transition-Review of Guidelines – Export Credit in Foreign Currency and Restructuring of Derivative Contracts

24. The transition away from London Interbank Offered Rate (LIBOR) is a significant event that poses certain challenges for banks and the financial system. The Reserve Bank has been engaging with banks and market bodies to proactively take steps. The Reserve Bank has also issued advisories to ensure a smooth transition for regulated entities and financial markets. In this context, it has been decided to amend the guidelines related to (i) export credit in foreign currency and (ii) restructuring of derivative contracts. Banks will be permitted to extend export credit in foreign currency using any other widely accepted Alternative Reference Rate in the currency concerned. Since the change in reference rate from LIBOR is a “force majeure” event, banks are also being advised that change in reference rate from LIBOR/ LIBOR related benchmarks to an Alternative Reference Rate will not be treated as restructuring.

Deferral of Deadline for Achievement of Financial Parameters under Resolution Framework 1.0

25. The resolution plans implemented under the Resolution Framework for COVID- 19 related stress announced on August 6, 2020 require sector specific thresholds to be met in respect of certain financial parameters. Of these parameters, the thresholds in respect of four parameters relate to operational performance of the borrowing entities, viz. Total Debt to EBIDTA ratio, Current Ratio, Debt Service Coverage Ratio and Average Debt Service Coverage Ratio. These ratios are required to be met by March 31, 2022. Recognizing the adverse impact of the second wave of COVID-19 and the resultant difficulties on revival of businesses and in meeting the operational parameters, it has been decided to defer the target date for meeting the specified thresholds in respect of the above four parameters to October 1, 2022.

Concluding Remarks

26. As the COVID-19 second wave ebbs, there is optimism that with adequate pandemic protocols and ramp-up in the vaccination rate, we should be able to tide over a third wave, if it occurs. As a nation, we should continue to be vigilant and ready to proactively deal with any resurgence of the pandemic with more rapidly transmissible mutants of the virus, should it happen.

27. The recovery remains uneven across sectors and needs to be supported by all policy makers. The Reserve Bank remains in “whatever it takes” mode, with a readiness to deploy all its policy levers – monetary, prudential or regulatory. In

parallel, our focus on preservation of financial stability continues. At this juncture, our overarching priority is that growth impulses are nurtured to ensure a durable recovery along a sustainable growth path with stability. In this endeavour, we have consciously chosen optimism over gloom, inspired by Mahatma Gandhi: “I am an irrepressible optimist, but I always base my optimism on solid facts”2.

Thank you. Stay safe. Stay well. Namaskar.

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RBI extends marginal standing facility relaxation till December 31

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI), in its August monetary policy, extended the relaxation under the marginal standing facility (MSF) by three more months.

This facility, which was extended in phases up to September 30, 2021, will now be available for a further period of another three months, i.e. up to December 31, 2021, to provide comfort to banks on their liquidity requirements.

“This dispensation provides increased access to funds to the extent of Rs 1.62 lakh crore and qualifies as high quality liquid assets (HQLA) for the LCR, the governor added.” RBI Governor Shaktikanta Das said while announcing the bi-monthly monetary policy.

On March 27, 2020, banks were allowed to avail of funds under the marginal standing facility (MSF) by dipping into the Statutory Liquidity Ratio (SLR) up to an additional one per cent of net demand and time liabilities (NDTL), i.e., cumulatively up to 3 per cent of NDTL.

Meanwhile, the RBI’s Monetary Policy Committee unanimously voted to keep the repo rates unchanged at 4 percent until necessary to prioritise growth and keep the financial system in India healthy.

The central bank has kept the MSF rate and bank rate unchanged at 4.25 percent. And reverse repo rate remains unchanged at 3.35 percent.

Click here for live updates on RBI’s 3rd bi-monthly policy meet.

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RBI to extend on-tap TLTRO scheme by 3 months to December 31

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) will extend the on-tap Targeted Long-Term Repo Operations (TLTRO) scheme till December 31, 2021, from the current September 30, 2021, said RBI governor Shaktikanta Das on Friday while making monetary policy announcements.

“On-tap, TLTRO scheme was announced to address stressed sectors identified by KV Kamath committee and NBFC needs,” Das said.

“Given the nascent and fragile economic recovery, it has now been decided to extend the on-tap targeted long-term repo operation (TLTRO) scheme further by a period of three months till December 31, 2021,” he said.

On March 27, 2020, he said, banks were allowed to avail of funds under the marginal standing facility (MSF) by dipping into the Statutory Liquidity Ratio (SLR) up to an additional one percent of net demand and time liabilities (NDTL), i.e. cumulatively up to 3 percent of NDTL.

“To provide comfort to banks on their liquidity requirements, including meeting their Liquidity Coverage Ratio (LCR) requirement, this relaxation which is currently available till September 30, 2021, is being extended for a further period of three months, up to December 31, 2021. This dispensation provides increased access to funds to the extent of Rs 1.62 lakh crore and qualifies as high-quality liquid assets (HQLA) for the LCR,” Das added.

Meanwhile, the RBI decided to keep the benchmark interest rate unchanged at 4 percent but maintained an accommodative stance as the economy is yet to recover from the impact of the second COVID wave.

This is the seventh time in a row that the Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das has maintained the status quo. RBI had last revised its policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.

Catch RBI policy related full coverage here

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RBI to conduct two GSAP auctions worth Rs 25,000 cr on August 12, August 26

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) will conduct two GSAP auctions worth Rs 25,000 crore on August 12 and August 26 to enable an orderly evolution of the yield curve, said RBI Governor Shaktikanta Das on Friday.

“Our recent GSAP auctions that have focussed on securities across the maturity spectrum are intended to ensure that all segments of the yield curve remain liquid,” Das said while announcing the third bi-monthly monetary policy.

The Reserve Bank’s secondary market G-sec acquisition program (G-SAP) has been successful in anchoring yield expectations while eliciting a keen response from market participants, he noted.

”We propose to conduct two more auctions of Rs 25,000 crore each on August 12 and August 26, 2021, under G-SAP 2.0. We will continue to undertake these auctions and other operations like open market operations (OMOs) and operation twist (OT), among others, and calibrate them in line with the evolving macroeconomic and financial conditions,” he said.

He further said that RBI will conduct fortnightly variable rate reverse repo (VRRR) auctions of Rs 2.5 trillion, Rs 3 trillion, Rs 3.5 trillion and Rs 4 trillion over the coming weeks.

RBI has been conducting 14-VRRR auctions as the main liquidity operations. This was reintroduced on 15 January 2021.

“We are increasing the quantum put under auction under VRRR window in response to market appetite,” Das said.

In parallel, access to the fixed-rate overnight reverse repo has been kept open, he said, adding markets have adapted and even welcomed the VRRR because of the higher remuneration it offers relative to the fixed-rate overnight reverse repo.

To provide comfort to banks on their liquidity requirements, including meeting their Liquidity Coverage Ratio (LCR) requirement, RBI further said they will extend the on-tap Targeted Long-Term Repo Operations (TLTRO) scheme till December 31, 2021.

The Reserve Bank of India’s monetary policy committee, meanwhile, kept interest rates steady at record lows on Friday, as widely predicted.

Catch RBI policy related full coverage here

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