Budget 2020

RBI money policy: EMIs stable, call for tax cut on fuel & other takeaways

NEW DELHI: The Reserve Bank of India on Wednesday tried to strike a conciliatory note by delivering on the expectations and extending an olive branch to bond traders, who had been revolting in the recent past.

The Monetary Policy Committee of RBI decided to keep the policy rate unchanged, maintained growth projections, pledged to keep money supply open and batted for a tax rate cut on fuel so that inflation may come down.

“One of the highlights in Wednesday’s money policy statement was the announcement of G-sec acquisition program 1.0, which the bond market needed the most. It may help cool off in bond yields and support the government’s market borrowing program,” said Deepthi Mathew, Economist at Geojit Financial Services.

The gesture was received well by the bond market, as the yield on the benchmark 10-year government bond fell by nearly 6 basis points to 6.078% as soon as RBI governor’s speech ended.

Here are key takeaways from the MPC meet outcome:

Rates unchanged: The policy rate has been at record low of 4 per cent for a while now. The MPC maintained the status quo on it, as revival of the economy requires cheaper money. This simply means your EMIs on home or vehicle loans will largely remain stable.

Fuel tax cut: RBI said some respite from the incidence of domestic taxes on petroleum products through coordinated action by the Centre and states could provide relief. Taxes make up nearly two-third of pump prices. Any tax cut on this front will result in ease in inflation.

Commodity prices: Surging commodity prices may have led to a rally in some related stocks but it has left RBI worried. Governor Shaktikanta Das said a combination of high international commodity prices and logistics costs may push up input price pressures across manufacturing and services. It also accentuates the downside risks to economic growth rate.

Money supply: Das reiterated that RBI is committed to keeping the surplus supply of money. Reflecting the surplus liquidity, reserve money rose by 14.2 per cent YoY as on March 26, 2021, while money supply (M3) grew by 11.8 per cent. Cheap supply of money is crucial for small and medium enterprises who are the backbone of Indian economy.

Rs 1L cr OMO in Q1: RBI announced a G-sec acquisition programme of Rs 1 lakh crore for the ongoing quarter. The first purchase of government securities for an aggregate amount of Rs 25,000 crore under G-SAP 1.0 will be conducted on April 15, 2021. This brought down yields. It means the government will be able to borrow money at cheaper rates, without much pressure on its finances and can keep its social and infra capex programmes running without a hitch.

More money for Nabard, Sidbi: RBI said it would provide liquidity support of Rs 50,000 crore for fresh lending during 2021-22 to All India Financial Institutions. It includes Rs 25,000 crore to NABARD; Rs 10,000 crore to NHB; and Rs 15,000 crore to SIDBI. This comes on top of Rs 75,000 crore infusion last fiscal. These institutions play a crucial role in India’s development and easy money for them means easy money for people.

TLTRO on Tap: In another liquidity-boosting measure, the central bank extended the On-tap TLTRO scheme till September 30. The scheme allows banks and NBFCs to buy corporate bonds, commercial paper, and non-convertible debentures issued by entities in some of the more affected sectors due to pandemic.

Keep more money in mobile wallets: Keeping with the increased adoption of digital wallets, RBI said users can now keep Rs 2 lakh in payment bank wallets now. Earlier the end of day balance was capped at Rs 1 lakh per individual customer. This will be a relief to shopkeepers who use wallets to receive payments.

RTGS, NEFT for fintech: RBI said RTGS and NEFT, currently limited to only banks, will be expanded to a host of other entities. With this, RBI allowed fintech and payments companies to be a part of the two centralised payment systems.

Unanimous decision: All members of the MPC were on board with the idea that growth should take front seat and hence reiterated to do whatever it was possessive to recover the economy. The unanimous decision removes ambiguity and keeps doubts over future roll back of money supply at bay.