For registration call @ 9958826967

RBI Monetary Policy Review (5 February 2021)

RBI Monetary Policy Review (5 February 2021)

Context:

RBI announced monetary policy review on Friday.

Background:

This will be the first meeting of the six-member MPC after Finance Minister Nirmala Sitharaman presented Budget 2021 in the Lok Sabha on February 1, amid the COVID-19 pandemic.

In the previous policy review meeting, the central bank left the key lending rate unchanged at four per cent.

Summary of the Debate

Key Highlights of the Policy:

  • RBI kept the Repo rate unchanged at 4.00%.

  • The Reverse Repo rate remained unchanged at 3.35%.

  • Bank rate and Marginal Standing Facility (MSF) remain unchanged at 4.25%.

  • CRR is maintained at 3% of NDTL.

Key takeaways from the Policy:

  • It has addressed the critical question of Government of India borrowing of 12 lakh crore next year with a noble scheme by which retail investor can tap in to the government bond market.

  • Earlier these schemes were announced through indirect methods but now India joins the countries like UK, Brazil, Hungry to have direct route for retail investor to tap in to the government bond market.

  • This is essentially aim at making sure that the government’s borrowing program does not face any hurdles.

  • The RBI has taken the advance sets of measures:

    • By allowing retail investors to get into the government bond market.

    • To allow banks to keep their government bonds under Held to Maturity segment. In other words, they don’t have to report the Mark-to-market losses every quarter end, depending on the bond fluctuation market.

  • This is what, the banks were slightly worried.

  • Therefore, the attractiveness of the government’s bond has been kept intact.

Mark-to-market losses
  • Mark-to-market losses are losses in an asset's value caused solely by a decline in market price.
  • Mark-to-market is designed to provide the current market value of a company's assets by comparing the value of the assets to the asset's value under current market conditions.
  • Many assets fluctuate in value, and periodically, corporations must revalue their assets given the changing market conditions.
  • Examples of these assets that have market-based prices include stocks, bonds, residential homes, and commercial real estate.
Held to Maturity
  • Held to Maturity securities are the debt securities acquired with the intent to keep it until maturity.
  • This type of security is recorded as an amortized cost on the financial statements of a company and is usually recorded in the form of the debt security with a particular maturity date.
  • The temporary price changes are not reported in the corporate accounting statements, however, interest income is reported in the income statement.

Why Bonds are expected to be rise?

  • World over, people in large have no confidence in the central bank than the government per se because the government bond can be liquidated through Seigniorage money (It is the difference between the face value of a currency note or coin, and its actual production cost), which not normally does by central bank.

  • People do have the liquidity in terms of parking, raising this money would not be difficulty, given that people are not investing excessively in other assets like the real estate or the gold, which they have been doing in the past. So, they are looking at stable investment avenue.

Important components of unchanging rate:

  • Economy is expected to get in to rebound in to this quarter or next, given that the vaccine is out, the fear factor in the people will reduce and they would like to get back to business in a more active manner. So, given that the credit offtake is expected to take place, if the rates kept on lower.

  • The randomly changing rate policy becomes complicated not only for banks, but even in terms of the investors looking on it for long term perspective.

How Monetary Policy is going to help different sectors?

  • Government: This policy of RBI fits in very well with the Budget projection that were made by Finance Minister.

  • Borrowers: By keeping the rates unchanged i.e., 4 percent repo rate, it gives clear signal to borrowers that they can continue to borrow at a lower rate and this will help the sectors like real estate and auto sector. In auto sector, today, most of the purchases are made by taking loans.

  • NBFCs: RBI has decided to allow banks to extend credits to NBFCs under the targeted long term operation scheme, it will ensure that banks are able to lend to NBFCs in a much more orderly fashion.

  • MSMEs: They have got a new scheme to provide incentive to banks to lend money to MSMEs. Those MSMEs which have not taken any loans up to 1st January, 2021, by this scheme, banks can extend credits to the MSMEs.

Possibilities of achieving the projected growth:

  • The growth projection that has been made by RBI are more conservative than the projection made by government or IMF.

  • The IMF projection is 11 percent, the government projection is 11 percent, the RBI projection is 10.5 percent in the Financial Year 2021-22.

  • India has in place two major vaccines which can be supply to a large chunk of the world. India has potential to export and it will gain better equity in the mindset of the people at larger on the globe which will actually build on the equity of this country and ultimately lead to prosperity in terms of export.

  • The impetus we are expected to get from the different sectors of the industries which have not been performing but have certainly given a rebounding fact in the last 4-5 months leading to GST revolutionary collection.

  • The potential of the country both in terms of creation of job, in terms of employment, we have much higher position almost in the tune of about 15 to 16 percent.

  • In India, we have a parallel economy which is almost strong as the normal economy, so that gives indirect impetus to economy framework.

Monetary Policy Committee (MPC)

  • MPC is a six-member committee constituted by the Central Government (Section 45ZB of the amended RBI Act, 1934).
  • The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%).
  • The MPC is required to meet at least four times a year.
  • The quorum for the meeting of the MPC is four members.
  • The resolution adopted by the MPC is published after the conclusion of every meeting of the MPC.
  • Once in every six months, the Reserve Bank is required to publish a document called the Monetary Policy Report to explain:
    • The sources of inflation
    • The forecast of inflation for 6-18 months ahead.

Composition of MPC:

  • The committee will have six members.
  • Of the six members, the government will nominate three.
  • No government official will be nominated to the MPC.
  • The other three members would be from the RBI with the governor being the ex-officio chairperson.
  • Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank.
  • Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.

Term:

  • Members of the MPC will be appointed for a period of four years and shall not be eligible for reappointment.

Comment

Upload File