MUMBAI:
The Reserve Bank of India (RBI) held rates steady on Thursday in a bid to combat inflation that has accelerated to its highest levels in more than five years, but the central bank retained its accommodative monetary policy stance as growth remains lacklustre.
The central bank’s Monetary Policy Committee (MPC) on Thursday decided to leave the key repo rate unchanged at 5.15 per cent and the reverse repo rate at 4.9 per cent.
The inflation has peaked.There is a space for the interest rate cut.The MPC will take action on rates at a right time rather ahead of time as we did in 2019,'' said Shaktikanta Das,governor, RBI while announcing the Sixth Bi-monthly Monetary Policy on Thursday.
The RBI has also decided to increase the insurance cost of bank deposits as the cover will be increased to Rs 5 lakh from Rs 1 lakh which was earlier announced by finance minister Nirmala Sitaraman in Budget 2020. The cost will be increased by 2 paise from 10 paise to 12 paise for a deposit of Rs 100 which wouldn't increase the costs of the bank.
GDP growth for 2020-21 by the RBI is projected at 6.0 per cent – in the range of 5.5-6.0 per cent in H1 and 6.2 per cent in Q3, said RBI.
The RBI cut its policy rate by 135 basis points over five straight meetings last year, before surprising markets in December by holding rates steady due to growing concerns over inflation.
It also forecast inflation be in the 5.4 per cent -5 per cent range in the first half of the upcoming fiscal year, as compared to its own prior projection of 4Percent -3.8 per cent for that period.
Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Life Insurance CompanyThe RBI also announced some measures to boost the real estate sector. To boost consumer home and auto loans, for the next six months, banks will be will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio.’
The path of inflation is, on a rising trajectory through Q4:2019-20. The outlook for inflation is highly uncertain at this juncture. On the other hand, economic activity remains subdued and the few indicators that have moved up recently are yet to gain traction in a more broad-based manner. Given the evolving growth-inflation dynamics, the MPC felt it appropriate to maintain status quo, said RBI.
The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth, said RBI.
For 2020-21, the economic growth outlook will be influenced by several factors like private consumption, particularly in rural areas, easing of global trade uncertainties,monetary transmission in terms of a reduction in lending rates and financial flows to the commercial sector ,said RBI..
The rationalisation of personal income tax rates in the Union Budget 2020-21 should support domestic demand along with measures to boost rural and infrastructure spending, said RBI.
New Measures
The RBI has decided that scheduled commercial banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020 from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR). This exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020.
With a view to further strengthening monetary transmission, it has been decided to link pricing of loans by scheduled commercial banks for the medium enterprises also to an external benchmark effective April 1, 2020. Detailed guidelines to this effect will be issued separately by the RBI..
As the process of formalisation of the MSME sector has a positive impact on financial stability and this process is still underway, it has been decided to extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1, 2020. The restructuring under the scheme has to be implemented latest by December 31, 2020. This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated January 1, 2019 as also the MSME entities which have become stressed thereafter. It is reemphasised that this is a one-time regulatory dispensation. Detailed guidelines, in this regard will be issued shortly by the RBI.
It has been decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector. This would complement the initiatives taken by the Government of India in the real estate sector. The detailed instructions will be issued shortly by the RBI..
The Cheque Truncation System (CTS), which is currently operational at the major clearing houses of the country, has stabilised well and it has made large efficiency gains. In view of this, a pan India CTS will be made operational by September 2020.With substantial growth in digital payments and maturity gained by entities in the payment ecosystem, it is desirable to have a Self-Regulatory Organisation (SRO) for orderly operations of the entities in the payment system.
The Reserve Bank will also put in place a framework for establishing an SRO for the digital payment system by April 2020 with a view to fostering best practices on security, customer protection and pricing, among others. The SRO will serve as a two-way communication channel between the players and the regulator/supervisor
Digital payments in India have been growing rapidly. The Reserve Bank shall construct and periodically publish a composite “Digital Payments Index” (DPI) to capture the extent of digitisation of payments effectively. The DPI would be based on multiple parameters and shall reflect accurately the penetration and deepening of various digital payment modes. The DPI will be made available from July 2020 onwards
Currently, market makers undertaking rupee interest rate derivative (IRD) transactions with non-residents by way of ‘back-to-back’ arrangements are required to recognise all rupee IRD transactions undertaken by their related entities globally, in their books in India. This arrangement is proposed to be extended to cover all market makers, whether or not they undertake back-to-back transactions. It is accordingly proposed that all rupee IRD transactions of market makers and their related entities globally, shall be accounted for in India. This measure would encourage higher non-resident participation, enhance the role of domestic market makers in the offshore market, improve transparency, and achieve better
regulatory oversight. The revised draft directions shall be issued by end-March 2020.