The monetary policy committee (MPC) of the Reserve Bank of India (RBI) has, predictably, chosen to keep the key rates unchanged. Given the fact that the headline inflation has gone beyond the target – by law, the RBI is bound to keep the headline inflation in the band of 2%-6% – the decision by the MPC to keep the rate unchanged is understandable.
The central bank and its chief Shakitkanta Das, however, have announced a slew of measures outside the MPC in its policy statement. These are significant in the context of the liquidity stress experienced by many sectors in the economy.
“Alongside sustained efforts to improve monetary transmission, the Reserve Bank is actively engaged in revitalizing the flow of bank credit to productive sectors having multiplier effects to support impulses of growth,” the RBI said.
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Scheduled commercial banks have now been allowed to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs) over and above the outstanding level of credit to these segments as at the end of the fortnight ending on January 31, 2020, from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR).
This exemption will be available for incremental credit extended up to the fortnight ending on July 31, 2020. This gives banks leeway to step up lending to these sectors. The CRR waiver will also reduce the cost of incremental lending to these stressed sectors. For instance, analysts at Edelweiss Securities Ltd believe that it could result in a benefit of 25-30 basis points.
Simultaneously, the RBI has also attempted to provide long-term liquidity:
“Since June 2019, the Reserve Bank has ensured that comfortable liquidity is available in the system to facilitate the transmission of monetary policy actions. With a view to assuring banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions and to further encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors, the Reserve Bank shall conduct term repos of one-year and three-year tenors in appropriate sizes for up to a total amount of ₹ 1,00,000 crore from the fortnight beginning on February 15, 2020 at the policy rate.”
Equally significant is the decision by the RBI to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector.
“This would complement the initiatives taken by the Government of India in the real estate sector,” the RBI has said.
The apex bank has also announced a one-time restructuring of loans to MSMEs that were in default but ‘standard’ as on January 1, 2019. This permitted without an asset classification downgrade.
“The Micro, Small and Medium Enterprises (MSMEs) sector plays an important role in the growth of the Indian economy, contributing over 28 per cent of the GDP, more than 40 per cent of exports, while creating employment for about 11 crore people,” the RBI said.
“As the process of formalization of the MSME sector has a positive impact on financial stability and this process is still underway.”
The central bank felt the need for extending the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST (goods and services tax)-registered MSMEs that were in default as on January 1, 2020. The restructuring under the scheme has to be implemented latest by December 31, 2020.
Indeed the no rate cut decision cannot be just dismissed as no news. The RBI policy statement has tweaked a number of things to ease liquidity in the system. How all these play out in the coming days will be interesting to watch. More than anything else, the policy statement gives a clue or two to how the RBI has managed to work around MPC to stay in sync with fiscal managers.