Allowing the cluster of short-term measures initiated since March 2020 to work their way to revive the Covid-ravaged economy, Reserve Bank of India (RBI) has, as expected, kept the repo rate intact at 4 per cent.
It also kept the stance of the monetary policy accommodative as a confidence booster to assure the industry that scope for future rate cuts is open as and when headwinds of inflation cools. It also assured to stand by to support financial markets as and when needed.
Thus, without cutting repo rates, RBI has been working to steadily reduce lending and borrowing costs to support the industry with expansionary liquidity policy and is proving effective with high frequency indicators showing signs of improvement. Improvement in the performance of the economy in Q2 (second quarter) is also encouraging to continue the path.
Banking On LAF
RBI adopted unconventional strategies to push growth by aggressive use of liquidity adjustment facility (LAF) and diversifying into innovative liquidity windows to bring down cost of fund. As a result, the borrowing costs of government has come down to a low of 5.82 per cent as on 1 December 2020, and even additional borrowings by state governments are working out to just 6.88 per cent.
The better-rated corporate sector too is able to access funds from financial markets at lower rates much below the average lending rates of banks. Now the window of on tap targeted long-term repo operations (TLTRO) is extended to the 26 stressed sectors identified by Kamath Committee to benefit larger sector of the economy.
The cost of bank borrowings has come down. The weighted average lending rates of banks on fresh loans have fallen by about 98 basis points since January 2020. But such low lending rates led to much steeper reduction of bank deposit rates.
The fixed deposit rates of banks are down by 175-200 basis points. The three-five year deposits of public sector banks are in the range of 4.9 to 5.25 per cent while private banks maintain at 5-7 per cent. When the inflation is 7 per cent, the negative returns on bank deposits are on rise amid falling lending rates.
Revival On Way
With some of the high frequency indicators showing clear signs of recovery, RBI has revised its gross domestic product (GDP) outlook of current fiscal upwards expecting positive trajectory, 0.1 per cent growth in Q3 and 0.7 per cent in Q4 cumulatively ending financial year (FY) 2020-21 at -7.5 per cent as against -9.5 per cent estimated earlier.
The inflation remained elevated at 6.8 per cent in Q3 to go down to 5.6 per cent in Q4 of FY21. It is expected to hover in the range of 5.2-4.6 per cent during 2021-22. With supply side disruptions petering and agriculture doing better, inflation is bound to soften in due course.
Evidencing the recovery, some high-frequency indicators are tending fast towards pre-Covid levels – agriculture, index of industrial production (IIP), transport, domestic trade etc, providing more promising growth in the coming quarters. The worst sufferers, however, continue to be hospitality and tourism, aviation and informal sector.
Going beyond the near term measures, RBI has been progressively improving the resilience of financial intermediaries with appropriate regulatory dispensation. RBI extended LAF to regional rural banks (RRBs). Directed banks and non-banks to plough back profits of financial year 2019-20 to shore up capital and not to pay dividend to shareholders. It can improve lending capacity.
Risk-based internal audit will be introduced in large urban cooperative banks and key NBFCs (non-banking finance companies) to improve quality of financial reporting. Enhanced minimum-security measures to strengthen technology delivery – Internet banking, mobile banking and debit card operations will be prescribed to upgrade safety and access to boost user confidence on digital platform.
The contactless card payment limit is also raised from Rs 2,000 to Rs 5,000 to increase customer convenience. RTGS is now operating round the clock on all days.
In order to deepen financial markets, related existing policies are under review. New policies are also in the making after stakeholder consultations are completed. The markets of credit default swaps (CDS), derivative markets, short-term money market instruments could deepen opening up with inclusive participation.
Based on the experience of handling Covid19-induced challenges, financial intermediaries, more importantly, commercial banks, cooperative banks and non-banks should take a cue from the changing regulatory environment.
Going beyond the short-term goals, the financial intermediaries should work assiduously to improve internal skill sets, competency and technology infrastructure on a sustained mode to effectively absorb the evolving nuances.
The implementation strategies, policies, rules, procedures and workflows at operating levels need to be suitably reformed and reengineered to hasten the pass through impact of the positive developments. Since many of the regulatory dispensations have to ultimately shape through the financial intermediaries to deliver value, their quick action is essential.
Hence preparedness of financial entities to operate on upgraded regulatory standards will need resetting risk management architecture and developing proportionate risk appetite.
Providing safe and secured user experience would need complete participation of the market players with compatible competencies. It will be in the larger interest of the sustainability of the financial system to own and join the enlarged financial and digital literacy plans of the central bank to build informed customer base.
Hence, it will be critical for the stakeholders to view the measures of the current monetary policy review as larger part of financial sector reforms and take transformative measures at the institution level to operate on more robust scale.
Unless regulated entities are able to sync their vision with regulators, it will be difficult to harness full potentiality of reforms. Hence, underlying theme of long-term perspectives of RBI should be better appreciated while working on near-term measures to deliver full value to the consumers.
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