Liquidity support, bond yield management: Key takeaways from RBI Policy

RBI monetary policy 2021: The recent surge in Covid-19 infections, however, imparts greater uncertainty to the outlook, RBI governor Shaktikanta Das said today

Given the rise in the spread of the coronavirus (Covid-19) infection and imposition of fresh localised lockdowns, the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) on Wednesday decided to leave the key repo-rate unchanged at 4 per cent. It also maintained the policy stance as ‘accommodative’ to keep the liquidity taps running in the economy.
 

“The recent surge in infections, however, imparts greater uncertainty to the outlook,” RBI governor Shaktikanta Das said today, setting the stage for the financial year of 2021-22 (FY22). April policy was the first bi-monthly MPC meeting of the new fiscal year. “Localised and regional lockdowns could dampen the recent improvement in demand conditions and delay the return of normalcy,” he said.
 

A status quo on rates and stance was expected by all 10 economists and market experts that Business Standard polled earlier this week.
 

Here’re the key takeaways from the policy outcome:
 

Repo, reverse repo rates: The RBI MPC decided to leave the repo, or short-term lending, rate unchanged at 4 per cent for the fifth consecutive time to support the fragile economic recovery. The reverse repo rate, meanwhile, stands at 3.35 per cent and the marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25 per cent.

"The MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent. It also unanimously decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of Cvid-19 on the economy, while ensuring that inflation remains within the target going forward," the governor said in his statement.
 

Growth projection: As expected, the six-member MPC kept gross domestic product (GDP) growth forecast unchanged for FY22 at 10.5 per cent even as the coronavirus pandemic makes an ugly comeback. 
 

For each quarter of FY22, the RBI gave real GDP growth forecasts at 22.6 per cent (Q1); 8.3 per cent (Q2); 5.4 per cent (Q3); and 6.2 per cent (Q4). 
 

Inflation: Even as upside risks to inflation remain in place due to high commodity and logistics costs, the Reserve Bank revised the consumer price index-based inflation marginally downwards. It now expects the retail inflation to be 5 per cent in Q4FY21; 5.2 per cent in Q1FY22; 5.2 per cent in Q2FY22, 4.4 per cent in Q3FY22, and 5.1 per cent in Q4FY22.
 

In its February bi-monthly policy, the RBI had projected headline CPI inflation at 5.2 per cent in March quarter of FY21 (Q4FY21), 5.2-5 per cent in H1FY22 and 4.3 per cent in Q3FY22.
 

VRRR auctions: In view of the success of variable rate reverse repo (VRRR) and given the rising level of surplus liquidity, the RBI has decided to conduct VRRR auctions of longer maturity. The amount and tenor of these auctions will be decided based on the evolving liquidity and financial conditions, Das said.
 

“This is a part of RBI’s liquidity management operations and should not be read as liquidity tightening. In fact, by paying a higher rate of interest on liquidity absorptions through the VRRR auctions, the RBI is indirectly expanding liquidity,” he added. 

G-SAP: The RBI on Wednesday announced a ‘G-Sec Acquisition Programme’ or G-SAP to sooth bond market participants. Under the first tranche of the programme, touted as G-SAP 1.0, the RBI will purchase government bonds (G-sec) worth Rs 25,000 crore of April 15. The central bank eyes bond purchases worth Rs 1 trillion during the April-June quarter of FY22 (Q1FY22). 
 

“The RBI’s endeavour is to ensure orderly evolution of the yield curve,” Das said in his statement.

TLTRO: Das announced that On-tap TLTRO scheme, which was available till March 31, 2021, has been extended by six months till September 30, 2021 to ensure requisite liquidity support to the economy.
 

Last year, the apex bank had announced an ‘On Tap TLTRO’ scheme worth Rs 1 trillion, to provide liquidity support to various economic sectors and banks. The TLTRO is available for up to three years and for a total amount of up to Rs 1 trillion at a floating rate linked to the policy repo rate for banks. 
 

Liquidity support: Apart from the extension of TLTRO scheme, Shaktikanta Das further announced fresh liquidity injection in the economy worth Rs 50,000 crore. The central bank will provide funds worth Rs 25,000 crore to Nabard (National Bank for Agriculture and Rural Development); Rs 10,000 crore to National Housing Bank (NHB); and Rs 15,000 crore to Sidbi (Small Industries Development Bank of India).
 

ARCs: The RBI governor said that the central bank will set up a committee to study the working of Asset Reconstruction Companies (ARCs) to ensure that they are able to meet the needs of the financial sector.
 

Other announcements:

• Besides the above mentioned steps, RBI governor Shaktikanta Das said that RTGS and NEFT facilities will be extended to prepaid instruments and white label ATMs.
   
• Bank lending to NBFCs for on-lending to PSL will be extended till September 30, 2021.
   
• Further, the RBI enhanced ways and means advance (WMA) limit to Rs 47,010 crore, up 46 per cent from current limit of Rs 32,225 crore.
   
• Cash withdrawal by full-KYC PPIs issued by non-bank users allowed.
   
• Interoperability among full-KYC PPIs has been made mandatory, Das said, adding that current outstanding limit on these prepaid instruments doubled to Rs 2 lakh.