Key highlights of the Monetary Policy – April 2021
Here are key takeaways from the monetary policy announcement by the MPC.
- The repo rate was held at 4% and the reverse repo rate at 3.35% with a commitment to keep rates low as long as required.
- As a result, the bank rate and MSF rate which are pegged at 25 bps above the repo rate, stayed put at 4.25%.
- MPC maintained accommodative monetary stance to offset the COVID-II impact and has committed to maintain this stance in the near future.
- Despite the bounce in Feb-21 CPI inflation by 97 bps, MPC revised its outlook for FY21 headline inflation lower from 5.2% to 5.0%.
- MPC maintained its GDP growth estimates at 10.5% for FY22 due to COVID-II risks; despite projections of better growth from World Bank and IMF.
- All the 6 MPC members unanimously voted to hold repo rates at 4% and keep the monetary stance accommodative, subject to inflation remaining under 6%.
COVID-II raises questions over growth impulses
The fourth quarter has been a testing time for most global economies due to the resurgence of COVID. Despite the massive monetary and fiscal stimulus globally, the resurgence of COVID has curtailed some of the multiplier benefits of the stimulus. Also, fresh lockdowns are expected across most advanced economies and that is likely to put pressure on global growth. IMF continues to be positive that global growth would not be impacted by COVID-II, but we really have to wait and see.
The NSO has pegged FY21 GDP contraction for India at -8.0%, factoring a 50 bps impact of the COVID resurgence. However, high frequency indicators like vehicle sales, railway freight, GST collections, e-way bills and steel consumption have been positive. For FY22, GDP growth is estimated at 10.5% with GDP estimated to grow 26.2% (Q1), 8.3% (Q2), 5.4% (Q3) and 6.2% (Q4).
MPC has flagged possible inflation risks
In the case of growth, COVID-II remains the key risk. But, factors affecting inflation could be lot more complex. While demand pull may be moderate, MPC expects supply side pressures to persist. According to RBI, one way to control supply-side inflation would be to cut levies on key inputs like petrol and diesel. That is doubtful in the midst of budgetary pressures. However, inflation outlook has been tempered from 5.2% to 5.0% for March-21 quarter, 5.2% for Jun-21 and Sep-21 quarters and 4.4% and 5.1% for the last 2 quarters of FY22.
MPC also noted that the sharp spike in commodity prices around the world resulted in a spike in industrial input inflation, which is evident from rising WPI. Hence, despite COVID-II lockdowns denting demand, the supply-side pressures could keep inflation high.
MPC traversed beyond the monetary policy path
Like in the past, RBI announced key policy changes pertaining to regulation, supervision, debt management and payment systems. Here is a quick take.
a) The TLTRO on-tap liquidity scheme which was supposed to expire on March 31, 2021 has been extended till September 30 to help RBI better tweak yields.
b) Maximum end-of-day balance limit for individuals holding payment bank accounts enhanced from Rs1 lakh to Rs2 lakh.
c) RBI to appoint committee to conduct comprehensive review of asset construction companies (ARCs) to make them more effective in debt resolution.
d) The priority sector on-lending scheme that banks implemented through NBFCs was to expire on 31 March and that has been extended till 30 September 2021.
e) The overall limit for ways-and-means advances for all states has been enhanced from the current Rs.32,225 crore to Rs.47,010 crore to tide over liquidity shortfalls.
f) RBI will design, construct and publish a Financial Inclusion Index on a periodic basis to reflect the broadening and deepening of financial inclusion in India.
g) Membership of Central Payment Systems (NEFT/RTGS) to be extended to PPI issuers, card networks, white label ATM operators in a phased manner for better reach.
h) To complement the digital infrastructure in Tier-3 and Tier-4 cities, RBI has allowed cash withdrawal at non-bank full-KYC PPIs too.
i) As a one-time measure, the tenure of holding ECB funds in term deposits with AD banks has been increased from 1 year to 2 years, valid till March 2022.
The message appears to be that inflation could still be a risk to the dovish policy of the RBI. We have to await detailed minutes on 22-Apr, which could set the tone for the next monetary policy scheduled to be announced on 04-June.