Monetary Policy: Accommodative, But Shadows Of Selective Tightening Emerge…

The RBI released its own budget-like document, wherein it reiterated its commitment towards an accommodative policy to support growth and also came out with supportive measures to ensure flow of liquidity to segments of the economy immediately in need of it. In this context, while on the one hand RBI announced phased restoration of CRR to pre-pandemic levels and on the other gave relaxation of deduction of credit disbursed to ‘New MSME borrowers’ from their NDTL for calculation of CRR. The additional measures focussed on the strengthening of the financial systems as well. As the economy is treading out of the unprecedented slowdown induced by the pandemic, the monetary policy is also gradually moving towards normalisation. We believe the normalisation of monetary policy is a step in the right direction, given the fact that policies effected during the times of extreme stress may lead to systemic risks in the future and also reduces the available fire power at hand to address future economic eventualities.

The Policy Action

The RBI kept the base rate unchanged, with the repo rate at 4%, and committing to an accommodative policy till growth sustains itself. But there are shades of rationalizing the liquidity management in the policy. The hike in CRR by 1%, to be implemented in two phases, takes the CRR back to the pre-pandemic level of 4%. Any CRR measure will have an impact on the credit multiplier. This is a measure which will have an impact on the cost of credit, with the 0.50% becoming effective from March 27, 2021. Lending by banks and also their borrowings will become more expensive, if they were to focus on safeguarding margins. It also has implications for the quantum of liquidity because to the extent of the hike in CRR, equivalent amount of money, by way of a certain percentage of the net time and demand liabilities of the banks, will go into the RBI. To that extent, liquidity will get curtailed. To state this more directly, this measure will have an impact on the cost of borrowing of the corporates as well as other borrowers.

Some of the other key developmental and regulatory policies which are part of the monetary policy statement are as follows:

  • Inclusion of NBFCs to avail on tap TLTRO scheme.
  • Extension of MSF relaxation by six months to Sept’30, 2021. This dispensation provides increased access to funds to the extent of ₹1.53 lakh crore.
  • Extension of the dispensation of enhanced HTM of 22 per cent up to March 31, 2023 to include securities acquired between April 1, 2021 and March 31, 2022.
  • Banks will be allowed to deduct credit disbursed to ‘New MSME borrowers’ from their net demand and time liabilities (NDTL) for calculation of CRR.
  • Capital conservation Buffer (CCD) of 0.625% and Net Stable Funding Ratio (NSFR) differed till 1st Oct 2021.
  • It is proposed to permit resident individuals to make remittances to IFSCs for investment in securities issued by non-resident entities in IFSCs.
  • Allowing retail investors to open gilt accounts with RBI.
  • FPI investment in defaulted corporate bonds will be exempted from the short-term limit and the minimum residual maturity requirement under the Medium-Term Framework.

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