EPW is a weekly magazine that covers various important issues of a political and economic nature. In this section, we give you the gist of the EPW magazine every week. The important topics are analyzed and explained in a simple language, all from a UPSC perspective.
RBI kept the policy rates intact for the seventh time in a row in the monetary policy review on 6 August 2021.
It last reduced the repo rate to 4% on 22 May 2020. The repo rate continues at 4% and the reverse repo rate at 3.35%, despite the hovering risks of inflation amid near uncomfortable numbers.
The stance of the policy is accordingly kept accommodative to continue its supportive policy stance so long as it is necessary for ensuring durable growth and also until the COVID-19 impact is mitigated. Retention of the stance of the monetary policy was, however, not unanimous indicating some intermingled diverse views.
As COVID-19 broke out, there had been widespread concerns about scarring effects on consumers’ spending.
Whenever containment measures are relaxed in contact intensive services, demand would return swiftly increasing consumer spending.
The early signs are visible with the car and consumer durable sales going up. The economy is in a better state now compared to May–June 2021, reflecting sustained adaptations to COVID-19-related protocols and easing of containment, forming a formidable pathway for growth.
External Sector Response
In an extraordinary health crisis that led to an economic crisis putting the life and livelihood of millions at stake, moderating the interconnected factors is likely to take time, but efforts have to be continued edging towards normalcy.
Crude oil price is a key factor that propelled inflation in many economies, even leading to policy rate action but it is set to moderate.
The average crude oil price during 2020 was $39.68, which steeply increased and ended at an average of $63.10 per barrel.
It is noteworthy that the Organization of the Petroleum Exporting Countries plus group of nations agreed to increase the oil production to pre-pandemic levels by September 2022 that can soften the spot and future crude oil prices from their peak in early July.
International crude oil prices remain volatile; any moderation in prices could contribute towards alleviating inflationary pressures.
In the interim, the RBI hinted at moderation of the indirect tax component of pump prices by the joint efforts of the centre and states.
The headline inflation can consequently taper with fuel and food inflation calming.
Positive Indications
Though many of the other key high-frequency indicators have dipped during May and June due to local lockdowns and closure of business units during the second wave of the pandemic, their revival in July has been indicative of their forceful comeback.
Noticeable is the resurgence of rural demand and the urban demand in the making.
The manufacturing purchasing managers’ index (PMI) that had dropped into contraction mode to 48.1 in June for the first time in 11 months, rebounded well into the expansion zone with a reading of 55.3 in July.
The services PMI recovered to 45.4 in July from 41.2 in June 2021 showing widening bandwidth of growth.
The initial quarterly results of non-financial corporates for the first quarter (Q1) 2021–22 and leading banks more importantly, the State Bank of India, and Bank of Baroda have shown better profitability and improving asset quality, indicating early signs of buoyancy.
The balance sheets of the corporate sector are shedding flab, turning more productive. The nuances of remote working due to COVID-19 protocols at workspace have brought a new wave of cost efficiency without compromising on the productivity that can be sustained in the future.
RBI’s Liquidity Support
The RBI ensured the availability of ample liquidity through its open market operations, both conventional and unconventional, since the onset of the pandemic to ensure the easing of financial conditions in support of domestic demand.
As part of secondary market operations, the RBI continued its G-Sec Acquisition Programme, which could continue to anchor the market yield to facilitate the government and corporate sector to raise funds at affordable rates.
To pump-prime the evolving growth nodes, the RBI extended the duration of the scope of the on-tap Targeted Long Term Repo Operations (TLTRO) scheme, initially announced on 9 October 2020, for five sectors, which was further extended to stressed sectors identified by the Kamath Committee in December 2020 and bank lending to non-banking financial companies in February 2021.
The operating period of the scheme was also extended in phases till 30 September 2021. Given the nascent and fragile economic recovery, it has now been decided to extend the on-tap TLTRO scheme further by a period of three months, that is, till 31 December 2021.
The resolution plans implemented under the Resolution Framework 1.0 for COVID-19-related stress announced on 6 August 2020 required sector-specific thresholds to be met in respect of certain financial parameters.
Variable Rate Reverse Repo (VRRR)
Under the revised liquidity management framework announced on 6 February 2020, the RBI has been conducting 14-day variable rate reverse repo auctions as its main liquidity operation.
With the commencement of normal liquidity operations, the VRRR—which was temporarily held in abeyance during the pandemic—has been reintroduced since 15 January 2021, and the initial absorption of Rs2 lakh crore has been rolled over in the subsequent fortnightly auctions. In parallel, access to the fixed-rate overnight reverse repo has been kept open.
Markets have adapted and even welcomed the VRRR given the higher remuneration it offers relative to the fixed-rate overnight reverse repo. Fears that the recommencement of the VRRR is tantamount to liquidity tightening have been allayed.
Transmission of Low Rates
Domestic borrowing costs have eased, including interest rates on market instruments like corporate bonds, debentures, commercial papers, certificate of deposits, and T-bills. In the credit market the transmission of lending rates has been stronger for micro, small and medium enterprises, housing, and large industries, most of which are linked to repo rates.
The low-interest rate regime has also thus helped the household sector reduce the burden of loan servicing.
The significant reduction in interest rates on personal housing loans and loans to the commercial real estate sector augurs well for the economy, as these sectors have extensive backward and forward linkages and are employment-intensive.
LIBOR Exit
The exit of London Interbank Offered Rate is a significant event that poses certain challenges for banks and the financial system.
The RBI has been engaging with banks and market bodies to proactively take steps for non-disruptive transition.
The RBI has also already issued advisories to the regulated entities to pave way for the management of risks arising from the transition.
Taking the guidance forward, the RBI facilitated by amending the provisions related to
export credit in foreign currency
restructuring of derivative contracts
Overview
The RBI affirmed its positive outlook to keep the gross domestic product estimate of FY22 at 9.5%.
Through the policy review, the RBI could pump positive adrenaline even by maintaining status quo but dived into convincing data to portray a convincing optimistic outlook eking out the right balance.
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