The Reserve Bank of India’s (RBI) Monetary Policy Committee has recently made the headlines by deciding to extend its accommodative policy stance for the rest of the current year as well as for 2021-22. This move is anticipated to spur a revival in the GDP in the coming months. In its Monetary Policy Report, the RBI had previously introduced various measures to combat the economic challenges induced by the Covid-19 pandemic.
The Key Decisions
The committee has decided to keep key policy rates unchanged to foster economic growth and alleviate the impact of the Covid-19 crisis. The Repo and reverse repo rates will remain untouched at 4% and 3.35% respectively due to the high inflation level.
Significant strides have also been taken to mitigate risks and promote the real estate sector, especially those areas heavily impacted by the pandemic. For instance, risk weights or the capital required to be set aside for individual home loans have been eased. Moreover, the loan limit for retail and small business borrowers has been increased.
The Implementation of RTGS and TLTRO
The Real-Time Gross Settlement (RTGS) system, a system for large-value interbank funds transfers, will now be available 24/7. Additionally, Targeted Long Term Repo Operations (TLTRO) of Rs 1,00,000 crores have been announced to spur the recovery of specific sectors.
The RBI has also launched Open Market Operations (OMOs) for State Development Loans (SDLs) to ensure market participants have access to liquidity and favorable financial conditions.
Understanding LTRO and OMO
Long Term Reverse Repo Operation (LTRO) is a mechanism employed to facilitate the transmission of monetary policy actions and ensure a steady flow of credit into the economy. It is instrumental in pumping liquidity into the banking system.
On the other hand, Open Market Operations (OMO) is a quantitative tool used by the central bank to control money supply in the economy. It operates through the sale or purchase of government securities to adjust money supply conditions. The central bank sells these securities to commercial banks to drain liquidity from the system and buys them back to infuse liquidity.
Forecasted Economic Trends
The RBI anticipates a fall of 9.5% in the real gross domestic product (GDP) in FY21. However, it expects that the GDP growth will break out of contraction and enter a positive zone by the fourth quarter of the current fiscal year (2020-21).
Furthermore, the inflation is expected to taper off in the next three months and likely ease to the projected target of around 4% (within a band of +/-2%) by the final quarter of FY’21.
The Three-Speed Recovery of the Economy
As per the committee’s projections, the economy is set to witness a three-speed recovery. This implies that individual sectors will rebound at varying paces, with some showing the fastest, modest, and slowest recovery rates. Sectors such as fast-moving consumer goods, automobiles, pharma and power are likely to be the first ones to bounce back, apart from agriculture.
About the Monetary Policy Committee
Established under the Reserve Bank of India Act, 1934, the Monetary Policy Committee is a statutory framework designed for maintaining price stability while taking into account the objective of growth. It consists of six members, including the Governor of RBI who serves as the ex-officio Chairman. Decisions are taken by majority vote, with the Governor casting the deciding vote in case of a tie.
Insights into Repo Rate and Reverse Repo Rate
The repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in times of fund shortages. It is a critical tool used by regulatory authorities to control inflation. Conversely, the reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.