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In the right direction

Apart from unchanged policy rates, RBI has introduced a slew of measures to contain inflation and enhance growth in its monetary policy review

In the right direction

The Reserve Bank of India has kept the policy rates unchanged in the monetary review. Repo rate will remain effective at four per cent and reverse repo rate at 3.35 per cent. The Monetary Policy Committee (MPC) has kept the policy rates unchanged in the last three monetary reviews. The repo rate is at a 15-year low. It has been cut by 115 basis points since February last year.

Repo rate is the rate at which the Reserve Bank gives loans to banks. Banks use the available cash to give loans. The reduction in the repo rate makes the capital available to banks at a cheaper rate, due to which the banks are able to give loans to the needy at a cheaper interest rate. The reverse repo rate is the reverse of the repo rate. This is the rate at which banks deposit surplus amounts with the Reserve Bank, in return for which the Central bank pays them interest. Usually, the RBI controls the liquidity present in the market through the reverse repo rate.

In recent months, the price of diesel and petrol has gone up, due to which inflation is expected to increase. The Consumer Price Index (CPI) for the fourth quarter of the current financial year is estimated at 5.2 per cent, compared to 5.8 per cent previously. Economic activities are accelerating after the lockdown is ended in a phased manner, leading to increased demand for credit. Therefore, the Reserve Bank has not yet felt any justification for further reduction in policy rates. However, the Reserve Bank may cut policy rates in subsequent monetary reviews if needed.

In the monetary policy review, the Reserve Bank said that small investors will also be allowed to buy government bonds. However, small investors will buy and sell government bonds under the supervision of the Reserve Bank. India will be the first country in Asia to allow small investors to buy bonds. Currently, only a few countries in the world have given such discounts to small investors. This decision of the Reserve Bank will broaden the Government's debt-taking sphere. The Government has set a target of taking a loan of Rs 12 lakh crore in the coming financial year. This step taken by the Reserve Bank will make it easier for the Government to achieve this goal. The Reserve Bank's move is also expected to expand the gilt market and debt market.

The incremental credit disbursement of all Scheduled Commercial Banks (ASCBs) is steadily increasing. The year-to-date (YTD) growth of the loan stood at 2.6 per cent from April 2015 to January 2021 as against 2.4 per cent in the corresponding period of the previous year. YTD refers to the period up to the first day of the calendar year or the current date of the financial year. The incremental loan disbursement of banks has been around three lakh crore since November 2020.

The demand for loans has increased in all sub-loan segments such as housing loans, auto loans and other personal loans and the loan disbursement can be further accelerated with the help of Emergency Credit Line Guarantee (ECLGS) scheme. This scheme is valid till March 2021. Under this, loans worth Rs three lakh crore have been disbursed to the MSME sector till January 8, 2021. However, the current loan disbursement rate cannot be called sufficient. Banks are still not offering new term loans as the demand is less. Therefore, the sectors most affected by the Corona pandemic, such as real estate, construction, textiles, etc. need to be given both functional and term loans. Data related to loan disbursements of state-run banks shows that 40 per cent of the credit disbursement was made to the retail and agriculture sectors during the Corona pandemic, while 52 per cent to the loan distribution industry and other businesses.

Keeping the policy rates unchanged by the Monetary Policy Committee will not reduce loan rates or loan instalments. However, this step taken by the Reserve Bank will also not cut the deposit rates, which will provide relief to the elderly depositors, who usually survive by the help of interest income. It is noteworthy that to maintain the balance between loan and deposit interest rates, when the loan interest rates are cut, the deposit interest rates are also cut. This keeps the balance between the bank's liability and assets.

The remaining 18,000 branches of banks will also be brought under the ambit of the Cheque Truncation System (CTS) by September 2021, so that paperless verification under CTS can be made possible. This process will make payment and settlement systems better, accurate and faster. The CTS has been used since 2010 and more than 1,50,000 lakh bank branches are working under this system.

The Reserve Bank is planning to issue digital currency to curb illegal transactions of cryptocurrencies. Currently, cryptocurrency remains the main source of illegal digital transactions. At present, for the banks, non-banking financial companies (NBFCs) and prepaid payments, there is a separate ombudsman. In place of separate ombudsmen, there would be one ombudsman in the country. The Reserve Bank will implement the Internet-based ombudsman scheme in June 2021. This arrangement will reduce the scope of the economic dispute, due to which a large amount of money stuck in the dispute will be used to increase economic activities.

To provide more capital to NBFCs, they too have been allowed by the Reserve Bank to acquire capital from tap-targeted long-term repo operations (TLTRO). In view of the shortage of capital during the Corona pandemic, the Reserve Bank has given permission to 26 sectors to receive capital from this system, based on the recommendation of the Kamath Committee.

The Reserve Bank is also going to make some technical amendments to provide more capital to micro, small and medium enterprises (MSMEs). The Reserve Bank will also encourage banks to give loans to MSMEs who have not taken loans from banks in the past so that the lack of capital does not become an obstacle in the way of MSMEs to start or expand their businesses. At the same time, the Reserve Bank is also planning to expand microfinance, because only through microfinance can the weaker sections be financially empowered.

According to Reserve Bank Governor Shaktikanta Das, the gross domestic product (GDP) can grow at a rate of 10.5 per cent for FY 2021-22. Das believes that the recovery in the economy is clearly visible and if the pace of improvement in the economy goes ahead with the current rate, then the economic condition can be expected to return to normal in the next financial year. In the Budget presented on February 1, the emphasis was on accelerating the pace of development and in the monetary review presented on February 5 too, the Reserve Bank has taken several measures to make the economy sound while keeping inflation under control.

The writer is the Chief Manager in the Department of Economic Research at the Corporate Centre of State Bank of India, Mumbai. Views expressed are personal

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