RBI Monetary Policy August 06: Highlights

After the economic shutdown in March, RBI came with all guns blazing to prevent the already slowing economy from choking. While there were early signs of recovery seen in the month of June, July again took a back step with the increased spread of the virus. During this period, inflation continued to remain on the higher side with supply chain shocks. While there was a debate going around growth versus inflation, everyone was eager to see the stance that will be taken by the RBI.

Here are some of the highlights from RBI Governor’s statement:

• The policy repo rate, the reverse repo rate, bank rate, and MSF remain unchanged at 4%, 3.35%, 4.25% & 4.25% respectively.
• Global Financial Markets, remain buoyant, have a disconnect from the underlying state of the economy.
• Global Manufacturing and Services PMI have entered into the expansion zone in July 2020. This shows some revival in the state of the economy
• Domestic food inflation remains elevated across most economies owing to the pandemic.
• The net FDI investment decreased to $4.4 billion from $7.2 billion a year ago. There was a surge in the equities FPI inflow by $1.2 billion over the same period last year, debt funds saw an outflow of $4.4 billion versus an inflow of $2 billion last year for the same period.
• Forex reserves increased to $534.6 billion equivalent to 13.4 months of imports.
• Higher taxes on petroleum products lead to an increase in retail prices will impart cost pressures in the future. However, considering various factors, inflation in H2FY21 is expected to soften.
• On the other hand, consumer confidence reduced further and external demand remains dull. Hence, GDP is expected to remain in the negative territory for the quarter as well as the full year.
• The different measures taken by RBI seem to have an impact. The reduction in the repo rate seems to be priced in completely and the borrowing costs have come down considerably.
• The borrowing costs for Commercial Papers of NBFCs have reduced to 3.80% and to 3.40% for non-NBFC borrowers as on July 31, 2020.
• The spread of various corporate bonds over similar tenor G-Secs has come down considerably.

• The spread for AA+ rated 3-year NBFC bonds also came down from 360 basis points to 139 basis points.
• After the Franklin Templeton debacle, the AUM of Debt MFs has stabilized and increased from 12.2 lakh crores on April 29 to 13.89 lakh crores on July 31, 2020.
• Additional Liquidity facility of 5000 crores is being provided to NABARD & NHB at the policy repo rate.
• With the underlying theme of preserving the Soundness of the Banking sector, a special window will be provided under the prudential framework of June 7th to resolve the debt burden of companies without changing the ownership.
• A special committee to be formed under KV Kamath to make recommendations to the RBI regarding the resolution plans.
• The gold loans offered until now are only 75% of the value of the ornaments and jewelry. However, the permissible limit has been now increased to 90% of the value.
• If a bank holds debt instrument through a mutual fund or ETF, it is used to be treated as an equity investment, and accordingly capital allocation rules were applied. However, now it is harmonized by bringing the changes. This will boost liquidity in the bond market as capital savings will increase for the banks.
• A slew of other measures was also announced like an automated system in e-Kuber to maintain liquidity requirements, to resolve digital payments, etc.

While RBI maintaining an accommodative stance to support growth, it remained cautious and waiting to see how the scenario unfolds in the coming months. In the meanwhile, it has again brought various reforms to enhance the structural support to increase the ability to drive growth, which is possibly the role of any central bank in the economy.