Skip to main content

Fourteenth EGROW Shadow Monetary Policy Committee Meet held on February 2, 2021


Recording of the event

Key Takeaways

  1. Expectation of double-digit growth in FY 2021 - 22.
  2. Lockdown has resulted in supply chain disruptions and shifts in demand patterns.
  3. RBI should shift focus from 4 +/- 2 percent to the entire band of 2-6 percent.
  4. Greater attention to core inflation relative to total inflation.
  5. Repo rate the only signal of an “inflation anchor” and should not be reduced.
  6. Banks HTM limits should be raised.
  7. Explicit forbearance for inflation targeting when GDP is below its previous peak.
  8. RBI should consider a special lending window to banks against qualifying MSME loans that will reduce lending rates to these troubled entities.

Recommendation of EGROW Shadow MPC

EGROW Shadow MPC Members
5 members - Pause

Guest Panelist from ASSOCHAM
3 member – Pause

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Arvind Virmani, Chairman, EGROW Foundation

For FY 21, NAS Advance estimate of GDP growth rate is - 7.7 percent, but I expect it to be better than -7.5 percent, with a double growth in FY22. The transition from Lockdowns has resulted supply chain disruptions and shifts in demand patterns that result in excess supply and excess demand in different parts of the domestic and World economy. I view the rise in commodity prices as part of the pandemic related external imbalance. Structural reforms since September 2019 till date, including in the Union Budget will result in an acceleration in GDP growth over the next decade. This will be attracting greater FDI and capital inflows, expanding the monetary base. Managing short term liquidity through sterilization, while ensuring long term availability of investable funds at competitive real rates will be a challenge for the RBI. The MPC framework needs to be retained with following minor changes. A) Shift of focus from 4 +/- 2 percent to the entire band of 2-6 percent, (b) Explicit attention to the gap between actual & potential growth & co-ordination with the actual inflation within the inflation band, (c) Explicit forbearance for inflation targeting when GDP is below its previous peak, (d) Greater attention to core inflation relative to total inflation.

2. Indranil Sengupta, Chief Economist, Bank of America Merrill Lynch

At inflation we look at 5 percent due to rise in vegetable prices but due to bird flu prices of chicken has gone down and price of fish gone up. Banks HTM limits should be raised. We look at around 4 percent hike in banks HTM rates. HTM hike will be the new OMO. Funding fiscal deficit will be a major challenge for RBI. Vaccines to be roll out for general public by June and mass roll-out by December. We are looking at pause by the RBI.

3. Ms. Upasna Bhardwaj, Senior Vice President, Kotak Mahindra Bank

We are looking at pause of repo rate by the RBI. Operative target is a bigger question. There has been an excessive liquidity and going ahead government tends to increase it. Overall, in last FY there has been a distortion between repo and reverse repo rate. Pressure on liquidity to remain intact. At current times, we can use either MSS which has been used earlier.

4. Mr. Abheek Barua, Chief Economist and Executive Vice President, HDFC

Expansionary fiscal policy coupled with rising commodity prices globally pose a threat to inflation. RBI faces the conflicting challenges of anchoring inflation and ensuring that the large government borrowing programme stemming from a high fiscal deficit does not push up bond yields. Apart from size of borrowing programme, (Rs 800 bn additionally this FY and Rs 12 trillion next year), rising inflation expectations on the back of steady high core inflation prints could push long yields up. Repo rate the only signal of an “inflation anchor” and should not be reduced. Reversal of CRR (from 3 to 4 per cent) cut due in April should be delayed or done in multiple phases. OMOs and Twists have to be used to manage long term bond yields. Term reverse repo auctions should be used tactically after assessing evolving liquidity situation. With rising growth prospects, capital inflows likely to rise. RBI should reduce FX intervention to prevent further liquidity auctions. This would also help to check commodity price inflation.

5. Dr. Charan Singh, CEO and Director, EGROW Foundation

The economy will be the fastest growing economy in the world in the years to come. The wholesale price index is not very high but the CPI is high. The liquidity in the system is doing well and is in surplus. The oil prices are expected to be in range of US $50 per barrel. The gold prices are expected to come down. The recent IIP is doing better and will recover. The core industries performance is also improving and expected to recover. In this scenario, the economy being in difficult times, growth rates having being compromised in the past, though projected to be good in the future, the NPA’s level are expected to rise. When the NPA’s level rise, their stress on banking sector is bound to occur. Though the government had made a provision for recapitalizing the banks, it may not show impact immediately. The stress level of banks will increase. NPA’s according to RBI may go up till 15 percent. The interest rates of other central banks have continued to be low. In this scenario and the circumstances, it is appropriate that the Reserve Bank follows an accommodative monetary policy but does not change the interest rate immediately. The Repo rate is related to inflation target rate and once the new inflation target rate is determined by April 2021, the Repo rate can move. My personal opinion is that the inflation targeting for a country like India which has very young demographics is not an appropriate tool.

Guest Panalists

1. Arti Mattoo, Chief General Manager, Punjab National Bank

RBI will continue to focus on the revival of the economy and boost consumption. The budget was focused on long term growth. The growth impulses outlined in the Union Budget would need to be supported through accommodating monetary policy. Even though CPI dipped in December 2020, the trajectory remains uncertain. Retail inflation eased to 4.59 percent in December 2020 from 6.93 percent in November 2020 mainly decline in food prices. The core inflation rate has not declined commensurately and is hovering at around 5.5 percent. As per data released by MOSPI, GDP growth during 2020-21 is estimated at -7.7 percent as compared to growth rate of 4.2 percent in 2019-20. The expected V-Shaped economic recovery is due to mega vaccination drive, robust recovery in services sector and robust growth in consumption and investment. There is large liquidity overhang in the system with the surplus hovering around Rs 6 trillion in December 2020, aided both by RBI operations in forex markets and by lower credit off take. The excess liquidity needs to be watched. In a bid to restore normal liquidity management operations, RBI has started conducting the variable rate reverse repo auction. Although the reinstalling of CRR to 4 percent would suck out liquidity to the tune of around Rs 1.43 trillion, but as of now in view of the large borrowing programme announced as well to encourage credit growth sufficient liquidity would need to be kept afloat in the system. Further to mitigate the MTM risks to the Banks investing in the G-Secs in the borrowing programme, not only the enhanced HTM limit of 22 percent of NDTL, currently available till March 2021 would need to be extended, but also a further enhancement in the HTM limit would aid the borrowing programme. We expect key policy rates to be kept unchanged in its monetary policy dated 5th February 2021 to support economic activity and maintain accommodative stance.

2. Raman Aggarwal, Co-Chairman, Finance Industry Development Council (FIDC)

While the various measures taken by RBI and Ministry of Finance have resulted in liquidity flow to the NBFC sector, the same has been concentrated to the top few NBFCs which are highly rated. The most authentic proof of the same is the RBI's Annual Report on Trends & Progress in Banking dated 29th December, 2020. The report has stated that out of the funds raised by banks using the TLTRO window, 88% of these funds were invested by banks in NBFCs which were rated AA and above. As a result, a large number of small and medium sized NBFCs continue to face liquidity challenges, for their growth. The Economic Survey for 2020-21 released by the Ministry of Finance on 29th January, 2021 has made an observation that due to the high level of subjectivity and lack of transparency, we should ignore the sovereign ratings assigned by international credit rating agencies, in spite of India's strong financials. Taking cue from this, I would like to point out that credit rating is a regulatory parameter when it comes to fund raising by NBFCs. Whether its acceptance of public deposits, funding of NBFCs through the TLTRO route, Partial Credit Guarantee Scheme, they all prescribe a minimum level of credit rating being an eligibility criterion. More so, even banks require NBFCs to have a minimum level of prescribed "bank loan rating" in order to fund them. Unless the concerned NBFC has the prescribed level of rating, it is not eligible, irrespective of its financial performance. This single factor has been a major stumbling block for a large number of small and medium NBFCs. The need is to consider parameters like CRAR, NPA levels, Profitability along with credit rating.

3. Shri S. C. Aggarwal, Senior Member, ASSOCHAM & CMD, SMC Group

The accommodative stance requires to be continued so as to enable Indian industry recoup after this event. The availability of liquidity together with the loans secured by a credit guarantee have ensured that industries have been able to tide over the immediate problems. The banking system liquidity has been kept at nearly Rs 6 trillion, while the entire system liquidity, including government balances, continues to remain above Rs 8-trillion mark and the RBI’s assurance so far has kept the rates ultra-low for everyone, including for top-rated private firms. The RBI financial stability report merely showcases the bad loans at banks that can emerge under various scenarios and stress tests, and the resultant impact on capital for these institutions. Businesses specially MSMEs may be able to repair their balance sheet faster if their interest costs could be reduced. We request RBI to consider a special lending window to banks against qualifying MSME loans that will reduce lending rates to these troubled entities. The capital structure specially of MSMEs tends to be capital scarce. That is balance sheets are often highly levered. This makes these industries fragile. Whilst the assistance provided has helped tide over immediate problems, continuing accommodation is required for these entities to repair their balance sheet. The restoration announcement and the act of restoring the normal timing for the window “should realign short-term rates towards repo rate and above”. It would be a very long time before the RBI gets back to its original stance of keeping liquidity contained at plus-minus 1 per cent of the total deposit base, which is roughly about Rs 1.5 trillion surplus or deficit liquidity, depending upon the stance of the monetary policy. The RBI still carries on with an ‘accommodative’ policy stance, and that too would likely not change before the second half of the calendar year. At last, we expect the MPC to maintain status quo in the upcoming policy. The strong guidance of keeping monetary policy accommodative into the next fiscal year has so far helped keep sovereign yields below 6%. Consequently, notwithstanding the recent optimism on recovery, we still expect them to adopt a cautious tone, flagging uncertainty about the resilience of demand after the festive season and downside risks due to the rising second wave of infection.