RBI Monetary Policy Highlights

On 5th Feb 2021, RBI Governor Mr. Shaktikanta Das announced the monetary policy after the MPC’s 3 day meet earlier this month. Here are the highlights of this announcement:

  • The MPC unanimously voted to keep the following rates unchanged: Repo rate at 4%, Reverse Repo Rate at 3.35%, MSF and Bank rate at 4.25%.
  • As per the Governor, inflation has eased below the level of 6% Dec-20 onwards. A rise in petrol prices during the past few months were due to increase in crude oil prices. Estimations for CPI inflation rates are: 5.2% in Q4’21, a range of 5.2% to 5% in H1’22 and down to 4.3% in Q3’22.
  • Outlook for GDP growth in FY22 is ~10.5%. A significant growth in capacity utilization of the manufacturing sector has been observed, from 47.3% in Q1’21 to 63% in Q2’21. Overall outlook on growth is higher than what was estimated earlier and to quote the Governor “Going forward, we see Indian economy moving in only one direction that is – upward”
  • Foreign Portfolio Investors have increased their investments in India during the past few months which indicate their restored faith in an emerging market such as India. To further promote investments from FPIs, RBI has taken additional measures by extending exemptions from the short-term and minimum residual maturity requirement under the Medium Term Framework (MTF) to defaulted corporate bonds.
  • Bond issuance has increased from Rs.4.6 lakh crore in the first three quarters of FY20 to Rs.5.8 lakh crore in the subsequent period during the current year which has improved liquidity in the bond market.
  • Reserve money increased 14.5% YoY in Jan-20 while money supply increased by 12.5%. Under TLTRO scheme banks will be funding NBFCs to further lend to stressed sectors. Credit to new MSME borrowers by Scheduled Commercial Banks can be deducted from NDTL for CRR calculation, for this purpose exposure per borrower must be capped at Rs.25 lakhs.
  • Retail investors can now directly invest in government securities (both primary and secondary markets) through RBI. To enable this ‘Retail Direct’ online platform will be developed. This will promote retail investors to invest in G-Sec and help smoothen the process of government’s borrowing during FY22.
  • HTM is to be restored at 19.5% Jun-23 onwards. Cash Reserve Ratio is to be normalized gradually in 2 phases. From 3% currently to 3.5% from 27th March’21 and further to 4% from 22nd May’21. This is meant to open up space for market operations.
  • Implementation of the last tranche of Capital Conservation Buffer and the Net Stability Funding Ratio has been deferred by another six months. As per ICRA this could lower the regulatory capital requirement of the banking sector by Rs.56000 crore.
  • A centralized helpline for addressing queries related to digital payments and settlements will be developed. Along with this, under consumer protection, a centralized system for customer grievance redressal will be set up.


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