MPC kept Repo Rate Unchanged, Maintaining Accommodative Stance

The Central Bank announced the fourth bi-monthly monetary policy for FY22 amid inflation remaining above its target for

two months. It was expected to be kept unchanged given the fast-rising risks to growth from external sources and

comforting developments on the inflation front. The RBI kept key policy interest rates unchanged to strengthen the fragile

economic recovery and reiterated an Accommodative Stance. The MPC voted 5-1 to retain the stance as long as necessary to

sustain growth on a durable basis, while ensuring that inflation remains within the target. With no change this time as well,

the repo rate currently stands at 4% while the reverse repo rate has been maintained at 3.35%.

The repo rate remains unchanged at 4%, stance remains Accommodative and inflation remains sticky.

Highlights of Monetary Policy:

Repo Rate: 4.00% (4.00% in August 2021)

Reverse Repo Rate: 3.35% (3.35% in August 2021)

Bank Rate: 4.25% (4.25% in August 2021)

Marginal Standing Facility: 4.25% (4.25% in August 2021)

GDP Projection: FY22 growth rate retained at 9.5%. Projection for Q2FY22 growth has been raised to 7.9% from earlier 7.3%. Q1FY23 GDP growth targeted at 17.2%

CPI Inflation: FY22 estimate lowered to 5.3% from the earlier 5.7%. Q1FY23 projected at 5.2% Some Highlights:

On the domestic front, real GDP expanded by 20.1% y-o-y during Q1FY22 on a large favourable base; however, its momentum was dragged down by the second wave of the pandemic

The rebound in economic activity gained traction in August-September, facilitated by the ebbing of infections, easing of restrictions and a sharp pick-up in the pace of vaccination

System liquidity remained in large surplus in August-September, with daily absorptions rising from an average of Rs7.7lk-cr in July-August to Rs9.0lk-cr during September and Rs9.5lk-cr during October (up to October 6) through the fixed rate reverse repo, the 14-day variable rate reverse repo (VRRR) and fine tuning operations under the liquidity adjustment facility (LAF)

No need for further bond-buying: RBI stops G-SAP bond buys, as the Governor Das said that need for undertaking further G-SAP operations does not arise. RBI will remain in preparedness to conduct G-SAP if and when needed. The Central Bank had bought Rs2.2tn through Government Securities Acquisition Programme (GSAP) in previous two quarters

Other Measures Announced: 1) Liquidity Measures:

On Tap Special Long-Term Repo Operations (SLTRO) for Small Finance Banks (SFBs): A three-year special long-term repo operations (SLTRO) facility of Rs10k-cr at the repo rate was made available to in May 2021 to be deployed for fresh lending of up to Rs10lakh per borrower. This facility was made available till 31st Oct, 2021. Recognising the persisting uneven impact of the pandemic on small business units, micro and small industries, and other unorganised sector entities, it has been decided to extend this facility till 31st Dec, 2021. Further, this will now be available on tap to ensure extended support to these entities.

2) Payment and Settlement Systems:

Introduction of Digital Payment Solutions in Offline Mode: The Statement on Developmental and Regulatory Policies dated 06th Aug, 2020 had announced a scheme to conduct pilot tests of innovative technology that enables retail digital payments even in situations where internet connectivity is low/not available (offline mode). Given the experience gained from the pilots and the encouraging feedback, it is proposed to introduce a framework for carrying out retail digital payments in offline mode across the country.

ECONOMIC UPDATE October 08, 2021

Monetary Policy - October 2021

Other Measures Announced:

2) Payment and Settlement Systems (contd.):

Enhancing Transaction Limit in IMPS to Rs5 lakh: The per-transaction limit in IMPS, effective from January 2014, is currently capped at Rs2lakh for channels other than SMS and IVRS. The per-transaction limit for SMS and IVRS channels is Rs5000. In view of the importance of the IMPS system in processing of domestic payment transactions, it is proposed to increase the per-transaction limit from Rs2lakh to Rs5lakh for channels other than SMS and IVRS. This will lead to further increase in digital payments and will provide an additional facility to customers for making digital payments beyond Rs2lakh.

Geo-tagging of Payment System Touch Points: Deepening digital payments penetration across the country is a priority area for financial inclusion. The setting up of Payments Infrastructure Development Fund (PIDF) to encourage deployment of acceptance infrastructure and create additional touch points is a step in this direction. Accordingly, it is proposed to lay down a framework for geo-tagging (capturing geographical coordinates-, viz., latitude and longitude) of physical payment acceptance infrastructure, viz., Point of Sale (PoS) terminals, Quick Response (QR) codes, etc., used by merchants. This would complement the PIDF framework by better deployment of acceptance infrastructure and wider access to digital payments.

Regulatory Sandbox-Announcement of the Theme for a New Cohort and On Tap Application for Earlier Themes: The Reserve Bank’s Regulatory Sandbox (RS) has so far introduced three cohorts. Six entities have successfully exited the First Cohort on ‘Retail Payments’ while under the Second Cohort on ‘Cross Border Payments’ eight entities are undertaking Tests. The application window for the Third Cohort of ‘MSME Lending’ is currently open. With a view to preparing the fintech eco-system, it is proposed that the topic for the Fourth Cohort would be ‘Prevention and Mitigation of Financial Frauds’. The focus would be on using technology to reduce the lag between the occurrence and detection of frauds, strengthening the fraud governance structure and minimizing response time to frauds. The application window for this cohort would be opened in due course. In addition, based on the experience gained and the feedback received from stakeholders, it is proposed to facilitate ‘On Tap’ application for themes of cohorts earlier closed.

3) Debt Management:

Review of Ways and Means Advances (WMA) Limits and Relaxation in Overdraft (OD) Facility for the State Governments/UTs:

As recommended by the Advisory Committee to review the Ways and Means Advances (WMA) limits for State Governments/UTs, the enhanced interim WMA limits totalling Rs51,560cr were extended by the Reserve Bank up to 30th Sept, 2021 to help States/UTs to tide over the difficulties faced by them during the pandemic. Considering the uncertainties related to the ongoing pandemic, it has been decided to continue with the enhanced WMA limits up to 31st March, 2022. It has also been decided to continue with the liberalized measures introduced to deal with the pandemic, viz., enhancement of maximum number of days of OD in a quarter from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days, up to 31st March, 2022. The above measures are expected to help States/ UTs to manage their cash flows better.

4) Financial Inconlusion and Customer Protection:

Priority Sector Lending-Permitting Banks to On-lend through NBFCs -Continuation of Facility: With a view to increase the credit flow to certain priority sectors of the economy which contribute significantly to growth and employment, and recognizing the role played by NBFCs in providing credit to these sectors, bank lending to registered NBFCs (other than MFIs) for on lending to Agriculture (investment credit), Micro and Small enterprises and housing (with an increased limit) was permitted to be classified as priority sector lending up to certain limits in August 2019, which was last extended on 07th April, 2021 and was valid up to September 30, 2021. Considering the increased traction observed in delivering credit to the underserved/unserved segments of the economy, it has been decided to extend this facility till 31st March, 2022. A circular in this regard will be issued shortly.

Internal Ombudsman for NBFCs: The increased significance, strength and reach of NBFCs across the country have necessitated having in place better customer experience including grievance redress practices. With a view to further strengthen the internal grievance redress mechanism of NBFCs, it has been decided to introduce the Internal Ombudsman Scheme (IOS) for certain categories of NBFCs which have higher customer interface. The IOS NBFCs, which will be on the lines of IOS for banks and non-bank payment system participants, will require select NBFCs to appoint an Internal Ombudsman (IO) at the top of their internal grievance redress mechanism to examine customer complaints which are in the nature of deficiency in service and are partly or wholly rejected by the NBFCs. Detailed instructions will be issued separately.

ECONOMIC UPDATE October 08, 2021

Monetary Policy - October 2021

Our View: Through the policy announced, the RBI is stuck to the tone promised. It stands by its approach of gradualism, and not

suddenness or surprises. As indicated by the Governor, the overall aggregate demand is improving but slack still remains;

output is still below pre-pandemic level and the recovery remains uneven and dependent upon continued policy support.

Also the supply side and cost push pressures are impinging upon inflation and these are expected to ameliorate with the

ongoing normalisation of supply chains. However, India is in a much better place today than at the time of the last MPC

meeting as the growth impulses are strengthening and inflation trajectory being more favourable than expected. The key

point announced is the lowered inflation rate. Inflation has been below the RBI's projections but core inflation however

remains sticky. A favourable than anticipated inflation trajectory and downward revision of CPI at 5.30% has allayed any

fears of near term rate hikes. RBI’s move to keep rates unchanged is welcomed by sectors like Housing, where despite the

inflationary pressures, as adequate liquidity, and stable repo rate will play a catalytic role in the robust recovery. Pent-up

demand, festival season should boost urban demand as recovery in demand gathered pace in Aug-Sept. Pick-up in import of

capital goods also points at some recovery in activity. Overall we are favourably poised with an encouraging ramp up on

vaccination rate across the country, ongoing festive season and opening up of the economy.

Lastly as said by the Governor, “We don't want to rock the boat when the shore is near as there is a journey beyond the

shores.”

Inflation Rate-CPI (%)

Index of Industrial Production-IIP (Change y-o-y %)

Source: tradingeconomics.com Source: tradingeconomics.com

FINAL VERDICT

REPO REVERSE CURRENT STANCE MPC Meetings

4.00% 3.35% ACCOMMODATIVE

August 2021

4.00% 3.35% October 2021

October 08, 2021 ECONOMIC UPDATE ECONOMIC UPDATE October 08, 2021

Monetary Policy - October 2021

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ECONOMIC UPDATE October 08, 2021

Monetary Policy - October 2021