Monetary Policy: Nurturing the Recovery

1. Policy Rates Unchanged
On expected lines, the RBI has kept the policy rates unchanged, the repo rate stays at 4%. The accommodative stance has been reaffirmed. The soft stance with adequate liquidity support will continue till sustainable growth emerges, and more so in the light of the resurgence in the second wave of the pandemic.

2. Inflation Estimates
The expected bumper crop of 20-21 may help moderate food prices. But the rise in international commodity prices, the sustained high crude prices, input price pressures in manufacturing etc. may lead to higher price level. “CPI inflation trajectory is likely to be subjected to both upside and downside pressures”. It is also to be noted that the south-west monsoon and its geographical distribution would also be a determining factor as far as the price level is concerned, especially food prices. The revised inflation projections are as follows – 5.00% in Q4:2020-21; 5.20% in Q1:2021-22; 5.20% in Q2; 4.40% in Q3; and 5.10 % in Q4. Therefore, the probability of prices remaining elevated is quite high.

3. Growth Estimates
High global commodity prices, the financial markets volatility and the resurgence of the second wave are factors that create uncertainties to the growth scenario. But positives are there in the form of aggressive vaccination programs, the gradual release of the pent-up demand, and the “investment enhancing and growth supportive measures” initiated by the government and the RBI. The growth estimate for FY22 has been retained at 10.50%.

4. G-SAP 1.0
This a secondary market government securities acquisition program to the tune of Rs.1 Lakh Crs for Q1 of FY22. The first such acquisition is planned for April 15 to the tune of Rs.25,000 Crs. The decision to conduct a secondary market acquisition of government securities is a measure that will be beneficial to the markets as the borrowings may go through in a smooth and non-disruptive manner. This will reduce the burden on the markets as an amount equivalent to Rs.1.15 Lakh Crs by way of primary government security issues is going to hit the markets every month. And this will have an adverse impact on liquidity which can be moderated to some extent by this acquisition program of the RBI. An enhancement of this limit in future cannot be ruled out. But that would depend on the assessment of the actual impact of the operations and the auctions. This is a positive step in containing the rise in yields of local currency bonds.

5. Additional Measures
Some of the additional measures announced by the RBI are as follows:

(i)TLTRO on Tap Scheme – Extension: As part of the accent on liquidity measures the TLTRO Scheme, which was originally announced on Oct. 9, 20 has been made available up to Sept. 30, 2021.

(ii)Liquidity Facility for All India Financial Institutions: Special refinance facilities of ₹75,000 crore were provided to All India Financial Institutions (AIFIs) like NABARD, SIDBI, NHB and EXIM bank during April-August 2020. Fresh liquidity support of ₹50,000 crore for fresh lending during 2021-22 will be provided to AIFIs: ₹25,000 crore to NABARD; ₹10,000 crore to NHB; and ₹15,000 crore to SIDBI.

(iii)Permitting Banks to On-lend through NBFCs: Bank lending to registered NBFCs (other than MFIs) for onlending to Agriculture, MSME and Housing is now permitted to be classified as Priority Sector lending (PSL). This is being made available for another six months, that is, up to Sept 30, 2021.

(iv)Priority Sector Lending (PSL): Enhancement of Loan Limit for individual farmers against pledge/hypothecation of agricultural produce, from ₹50 lakh to ₹75 lakh per borrower has been effected.

(v)WMA limit for States/UTs: The Ways and Means Advances (WMA) limits for State Governments/UTs has been enhanced to ₹47,010 Crs, an increase of about 46 per cent from the current limit of ₹32,225 Crs. The enhanced interim WMA limit of ₹51,560 Crs granted by RBI due to the pandemic has been extended for six months, up to Sept. 30, 2021.

The policy is accommodative in every aspect and detail, and the accommodative stance will be beneficial to
both equity and fixed income markets. The introduction of G-SAP1.0, and the decision to continue with the
liquidity enhancement polices till the end of Q2 of this year, will go a long way in helping individuals and
corporations to plan things better, especially in the light of the second wave of infections. The approach to
fixed income portfolios remains unchanged as the accent will be on short end products and portfolios which
carry low or minimal interest rate risk. The equity market would be the major beneficiary with this assurance
of support from the RBI. Indeed, an aggressively accommodative stance that will nurture the economic

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