Saturday, August 8, 2020

RBI releases Monetary Policy Statement

 The Reserve Bank of India (RBI) has released the Monetary Policy Statement on 6 August, 2020.

The Monetary Policy Statement  is published by the Monetary Policy Committee (MPC) of RBI.

The MPC is a statutory and institutionalized framework under the RBI Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.

The MPC determines the policy rate with objective of achieving medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth..

The Governor of RBI is ex-officio Chairman of the MPC.

Important Points

1.Policy Rates remains unchanged:

Repo rate remains at 4% and the reverse repo rate at 3.35%.

RBI has kept the policy rates unchanged because of rising retail inflation levels.Retail inflation (measured by the Consumer Price Index - CPI) rose to 6.09% in June 2020 from 5.84% in March, breaching the central bank’s medium-term target of 4±2%.This inflation range (4% within a band of +/- 2%) was recommended by the committee headed by Urjit Patel in 2014.

2.Loan Restructuring:

RBI has allowed banks to restructure loans to reduce the rising stress on incomes and balance sheets of large corporates, Micro, Small and Medium Enterprises (MSMEs) as well as individuals.

A large number of firms that otherwise maintain a good track record are facing the challenge during pandemic period as their debt burden is becoming disproportionate, relative to their cash flow generation abilities.

This can potentially impact their viability for long term and pose significant financial stability risks if it becomes widespread. It may also lead to an increase in Non-Performing Assets.

However, only those borrowers will be eligible for restructuring whose accounts were classified as standard and not in default for more than 30 days with any lending institution as on 1st March, 2020.

All other accounts will be considered for restructuring under the Prudential Framework issued by the RBI in 2019, or the relevant instructions as applicable to specific categories of lending institutions where the prudential framework is not applicable.

The restructuring efforts may or may not include a moratorium on instalment repayments. RBI has left the decision of moratorium on banks, with an eye on averting such loans from slipping into non-performing assets.

The loan restructuring scheme will be worked out by a committee headed by KV Kamath (former ICICI Bank Chairman).

3.Liquidity Support:

An additional special liquidity facility of Rs.10,000 crore, equally to be split between National Bank for Agriculture and Rural Development (NABARD) and the National Housing Bank (NHB) to help small financiers and home loan companies amid Covid-19 difficulties.It can be noted that higher share of moratoriums are being availed by the retail borrowers which has created the need for such liquidity support to lenders.The liquidity facility to both NABARD and NHB will be offered at the policy repo rate.

4.Growth Projection:

Economic activity had started to recover from the lows of April-May 2020 following the uneven reopening of some parts of the country in June 2020.However, due to rise in fresh Covid-19 infections have forced renewed lockdowns in several cities and states, and economic indicators have levelled off.The recovery in the rural economy is expected to be robust, buoyed by the progress in kharif sowing.

Manufacturing firms responding to the RBI’s industrial outlook survey expect domestic demand to recover gradually from the second quarter of 2020-21 and sustain through the first quarter of 2021-22.

For 2020-21 as a whole, real Gross Domestic Product (GDP) growth is expected to be negative. Early containment of the pandemic may improve the outlook.

5.Industrial production :

The pace of contraction of industrial production, measured by the index of industrial production (IIP), moderated to (-) 34.7 per cent in May from (-) 57.6 per cent a month ago, with the easing of lockdowns in different parts of the country. All manufacturing sub-sectors, except pharmaceuticals, remained in negative territory. The output of core industries in June contracted for the fourth successive month though with a considerable moderation. The Reserve Bank’s business assessment index (BAI) for Q1:2020-21 hit its lowest mark in the survey’s history. The manufacturing PMI remained in contraction, shrinking further to 46.0 in July from 47.2 in the preceding month.

6.According to MPC, the economy is experiencing unprecedented stress in an austere global environment. Extreme uncertainty characterises the outlook, which is heavily contingent upon the intensity, spread and duration of the pandemic – particularly the heightened risks associated with a second wave of infections – and the discovery of the vaccine. In these conditions, supporting the recovery of the economy assumes primacy in the conduct of monetary policy.

Source - RBI website & The Hindu

Image source - Financial Express

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