More freedom to banks, further rate cut not ruled out: 10 key takeaways from policy meet


NEW DELHI: The focus of Reserve Bank of India (RBI) shifted to alternate methods of providing reliefs rather than pumping more money into the banking system, in a way accepting most of industry and Street’s demands.

RBI gave more freedom to banks to deal with loans while keeping mum on moratorium. The monetary policy committee (MPC) said India’s GDP growth is likely to slip in the red during the fiscal year.

As per expectations, the committee unanimously voted to maintain the status quo. It kept repo rate at 4 per cent and reverse repo rate at 3.35 per cent while not ruling out further rate cuts.

Here are key takeaways from the policy meet:


Liquidity shot in the arm for MFs

RBI Governor Shaktikanta Das said abundant liquidity has supported many segments of financial markets, including mutual funds, and the situation has stabilised since the Franklin Templeton episode.

Assets under management of Debt MFs, which fell to Rs 12.20 lakh crore as on 29 April, 2020, recovered and improved to Rs 13.89 lakh crore as on July 31, 2020, he said.

Debt resolution window for corporates

In a step that can help banks with containing NPAs, the RBI said it will provide a debt resolution window to enable lenders to implement a resolution plan in respect of eligible corporate exposures as well as personal loans. Such exposures will be classified as standard assets, subject to specified conditions.

Recasting of MSME loans

The central bank allowed restructuring loans of the MSME sector, which came under heavy stress due to the lockdown and the following slump in demand.

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“It has been decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on 1 March, 2020. This restructuring will have to be implemented by 31 March, 2021,” the central bank said.

More loans for your gold

As gold prices have been soaring, the central bank said it will now allow lenders to lend 90 per cent of the value of gold jewellery against earlier 75 per cent. This is likely to help Indian households, who are sitting on the largest amount of gold ornaments in the world.

Lockdowns hit high-frequency indicators

The MPC said even though the economic activity had started to recover from the lows of April-May, the surges of fresh infections have forced re-clamping of lockdowns in several cities and states. Consequently, several high frequency indicators have levelled off.

Petro tax fuel inflation

The central bank said higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost push pressures going forward.

It said inflation will remain elevated in the second quarter but may ease once new crops come into the market. Nonetheless, upside risks to food prices remain as vegetables and protein-based food items (meat, fish, etc.) could also emerge as a pressure point.

Low rates give boost to bond market

Lower borrowing costs have led to record primary issuance of corporate bonds of Rs 2.1 lakh crore in the first quarter of 2020-21, the MPC said.

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It noted the transmission of policy rate cut to bank lending rates has improved further, with the weighted average lending rate (WALR) on fresh rupee loans declining by 91 bps during March-June 2020.

Das in his statement noted that borrowing costs in financial markets have dropped to their lowest in a decade, with commercial paper yield for NBFCs falling to 3.8 per cent and non NBFCs to 3.4 per cent.

GDP to take a plunge

For the year 2020-21, as a whole, real GDP growth is expected to be negative, the MPC said. “An early containment of the Covid-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks,” it said in its statement.

Space for rate cut available

The committee said the economy is going through unprecedented stress and hence supporting the recovery of the economy assumes primacy in the conduct of monetary policy.

“While space for further monetary policy action in support of this stance is available, it is important to use it judiciously and opportunistically to maximise the beneficial effects for underlying economic activity,” it said.

Eternal optimism

Despite all challenges on the monetary and economic front, Governor Das said he remains eternally optimistic. “Throughout this traumatic period, one thing has stood out – the indomitable spirit of humanity, the inner conviction that whatever be the challenge, we have the innate resilience to combat them, overcome them and emerge victorious,” he said.

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