The Reserve Bank of India (RBI) on Thursday retained its key short-term lending rates but maintained its growth-oriented accommodative stance in its August policy review meeting. 

The six-member Monetary Policy Committee (MPC) of the central bank, headed by RBI governor Shaktikanta Das, maintained the repo rate or short-term lending rate for commercial banks, at 4 percent. Likewise, the reverse repo rate stands unchanged at 3.35 percent.

Repo rate is the rate at which the RBI lends to banks, while the reverse repo rate is at which it borrows from banks. 

RBI has also decided to add more glitter to gold ornaments and jewelry by allowing banks to give loans up to 90 percent of the value of such items pledged by borrowers.

Here are the highlights on RBI's monetary policy review: 

* Status Quo

The MPC kept the repo rate and reverse repo rate unchanged at 4 percent and 3.35 percent respectively while maintaining the accommodative stance. Notably, MPC voted unanimously in favor of the status quo, thus opening up possibilities for more future rate cuts. RBI said the space for further monetary policy action is available but advisable to be judicious.

* Additional Liquidity facility for NABARD, NHB

The Reserve Bank of India has once again turned its attention to meeting the funding requirements of NBFCs, MFIs and housing finance by providing additional special liquidity facility (ASLF) of Rs 10,000 crore to National Housing Bank (NHB) and the National Bank for Agriculture and Rural Development (NABARD).

As per the RBI decision, under the special liquidity facility, both NHB and NABARD would be provided Rs 5,000 crore capital each that will be used to refinance the identified sector.

Das said that Rs 5,000 crore to the NHB would be used to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies.

The liquidity facility to NABARD, he said, would ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity.

The All India Financial Institutions (AIFIs) play an important role in meeting the long-term funding requirements of agriculture and the rural sector, small industries, housing finance companies, NBFCs, and MFIs. These are the segments where funding needs are felt the most during the current Covid-19 fuelled the crisis.

* Debt restructuring for MSME

The Reserve Bank of India on Thursday extended a scheme whereby stressed MSME borrowers will become eligible for restructuring their debt, provided their accounts with lenders were classified as 'standard' as on March 1, 2020.

Accordingly, the existing loans to MSMEs classified as 'standard' will be re-structured without a downgrade in the asset classification.

According to the RBI Governor, this restructuring will have to be implemented by March 31, 2021.

The Reserve Bank placed eligibility conditions such as the limit of aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower should not exceed Rs 25 crore as on March 1, 2020.

Besides, the borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration.

* Online Dispute Resolution System for Digital Payments

In a major development for digital payment services, the Reserve Bank of India has decided that payment system operators (PSOs) will have to implement Online Dispute Resolution (ODR) systems in a phased manner.

The RBI has said that to begin with, authorized PSOs shall be required to implement ODR systems for failed transactions in their respective payment systems. Based on the experience gained, ODR arrangements will be extended to other types of disputes and grievances.

As the number of digital transactions rises significantly, there is a concomitant increase in the number of disputes and grievances, said RBI. 

* Inflation in Focus

Headline inflation is expected to remain at an elevated level in Q2FY21, but is likely to ease during the second half of the current fiscal aided by a favorable base effect, RBI Governor Shaktikanta Das said on Thursday.

Inflation stays high, said RBI governor. "Domestic food inflation has remained elevated across economies ever since the coronavirus outbreak," said RBI governor Shaktikanta Das.

However, he added that agriculture sector prospects have improved with the good monsoons and rise in the Kharif sowing area.

MPC projected retail inflation to remain elevated in Q2. However, it added that a more favorable food inflation outlook might emerge on good farm produce.

* Scheme of offline retail payments using cards and mobile devices

The RBI proposed to allow a pilot scheme for small value payments in off-line mode with built-in features for safeguarding the interest of users, liability protection, etc.

The central bank said the instructions in this regard will be issued shortly.

"Based on experience gained, detailed guidelines for the roll-out of the scheme will be announced in due course," RBI said.

* Increase in permissible loans against gold Ornaments and jewelry

RBI allowed an increase in the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewelry for non-agricultural purposes from 75 percent to 90 percent. This relaxation shall be available until March 31, 2021.

* Special Resolution Window for Covid-linked stress

The Reserve Bank of India (RBI) has decided to provide a special window under its 'prudential framework for resolution of stressed assets' for Covid-related stress, wherein lenders can implement a resolution plan without changing the ownership while classifying such exposures as 'standard'.

The Reserve Bank of India Governor said that the move has been announced in a bid to provide relief to stressed companies which have not been able to repay loans due to cash flow issues amid the pandemic.

The framework shall not be available for exposures to financial sector entities as well as central and state governments, local government bodies (e.g. municipal corporations), and anybody corporate established by an Act of Parliament or State Legislature, said RBI.

Only those borrower accounts shall be eligible for resolution under this framework that was classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.

The accounts should continue to remain standard till the date of invocation. The resolution plan may be invoked anytime till December 31, 2020, and shall have to be implemented within 180 days from the date of invocation, RBI said.

Lenders shall have to keep additional provisions of 10 percent on the post-resolution debt.

The Reserve Bank is constituting an Expert Committee under the chairmanship of K.V. Kamath which shall make recommendations to the RBI on the required financial parameters.

Also Read: Worst seems to be over for Indian economy: DEA report

* Creation of innovation hub

Areas such as cybersecurity, data analytics, delivery platforms, payments services, etc., remain at the forefront when we think of innovation in the financial sector, RBI said.

To promote innovation across the financial sector by leveraging on technology and create an environment that would facilitate and foster innovation, RBI will set up an Innovation Hub in India.

The Innovation Hub will act as a centre for ideation and incubation of new capabilities which can be leveraged to create innovative and viable financial products and/or services to help achieve the wider objectives of deepening financial inclusion, efficient banking services, business continuity in times of emergency, strengthening consumer protection, etc, said RBI.

The Innovation Hub will support, promote, and hand-hold cross-thinking spanning regulatory remits and national boundaries.

* Sombre growth outlook

RBI said that the real GDP growth of the country may remain in a negative zone in the first half and overall FY21.

The output of core industries in June contracted for the fourth successive month though with a considerable moderation.

The Reserve Bank’s business assessment index (BAI) for Q1FY21 hit its lowest mark in the survey’s history. The manufacturing PMI remained in contraction, shrinking further to 46.0 in July from 47.2 in the preceding month.

However, high-frequency indicators of services sector activity for May-June indicate signs of a modest resumption of economic activity, especially in rural areas, although at levels lower than a year ago.

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