Sunday, December 10, 2023

Growth Centric Monterey Review

By Satish Singh

The Reserve Bank of India has kept the policy rates unchanged in the monetary review conducted on June 4 2021. Also, the growth forecast in the economy has been reduced by one percent in the current financial year. The Monetary Policy Committee (MPC) has unanimously kept the repo rate at 4.00 percent, the reverse repo rate at 3.35 percent, the marginal standing facility rate at 4.25 percent and the bank rate at 4.25 percent. However, the MPC has assured that it can cut the policy rates in the coming months if required. It is noteworthy that the MPC did not make any change in the policy rates even in the monetary review done in April 2021. This is the sixth consecutive time that the Reserve Bank has not made any change in policy rates. Since the year 2020 till now, the Reserve Bank has cut policy rates by more than 1.50 basis points.

According to the MPC, there is a need to provide financial help to the businessmen currently. The pace of growth during the second half of the financial year 2020-21 can be regained at present only if businessmen are financially supported. The central bank’s emphasis is on accelerating the growth rate and keeping the monetary policy stance soft. Therefore, the central bank is making constant efforts to accelerate the growth rate and keep inflation under control. Last year there was a contraction of 7.3 percent in the economy. For the current financial year also, the Reserve Bank has lowered the growth forecast. According to the MPC’s estimate, inflation in the current financial year will be 5.1 percent, which is within the target range of 2 to 6 percent fixed by the Reserve Bank.

The central bank has lowered the GDP forecast, at the same time, slightly raising the inflation forecast. Now real GDP growth is projected at 9.5 per cent in 2021-22. The central bank has estimated GDP growth at 18.5 percent in the first quarter, 7.9 percent in the second quarter, 7.2 percent in the third quarter and 6.6 percent in the fourth quarter in the financial year 2021-22, while the consumer price index (CPI) based inflation in the financial year 2021-22 is estimated to be 5.1 percent. According to the Reserve Bank, retail inflation will be 5.2 percent in the first quarter, 5.4 percent in the second quarter, 4.7 percent in the third quarter and 5.3 percent in the fourth quarter in the financial year 2021-22.

To support the economy, the Reserve Bank will buy government securities worth Rs 40 thousand crore on June 17, while in the second quarter, government securities worth Rs 1.20 lakh crore will be bought by the Reserve Bank. The central bank will also buy bonds of Rs.10,000 crore issued by the states. According to the Reserve Bank, foreign exchange reserves may touch the level of $ 600 billion in the coming weeks. Foreign exchange reserves have increased by more than $ 135 billion since the beginning of the year 2020. Significantly, more foreign exchange reserves help to keep the value of rupee stable against the dollar. Along with this, it also makes easier to import essential goods.

According to the Reserve Bank, in view of the second wave of corona virus, a special loan window will be opened for the hospitality industry sector. Under this scheme, travel agents, tour operators, adventure-heritage services providers, aviation-related ground handling and supply chain services, private bus operators, car repair and car hire providers, event organizers, Spa clinics and beauty parlour operators can take loans. Banks can borrow from the Reserve Bank at the repo rate to lend businessmen at a concessional rate. Lending at repo rate will be given for 3 years and this facility will be available till March 31, 2022. Apart from this, 16 thousand crore rupees will also be made available for lending to SIDBI, so that loans can be made available at concessional rates to Micro, Small, Medium Enterprises (MSMEs). In the second wave of Corona epidemic, MSMEs have suffered the most.

To remove the problems of the common man, the Reserve Bank has announced to keep the National Automated Clearing House (NACH) operational for seven days i.e. throughout the week. It is noteworthy that the NACH system has become very popular in the past years due to the large-scale transfer of subsidy amount to the beneficiaries through Direct Benefit Transfer (DBT). Its importance has increased even more during the corona epidemic. Through this system, financial help has been provided to farmers and needy people during the Corona period.

After the introduction of this new facility from August 1, 2021, banks will conduct transactions on Sundays and other holidays as well. NACH is a large-scale payment system operated with the help of National Payment Corporation of India (NPCI). This system provides facility to transfer payments like dividend, interest, salary, pension to multiple accounts in one go. Apart from this, it provides facility to deposit electricity bill, telephone bill, gas connection bill, water bill, loan instalment, mutual fund, insurance instalment etc.

The Money is automatically debited from the account through NACH when the customer gives his consent for transfer of his money through Electronic Clearance Service (ECS) to another bank. Therefore, if someone has taken the facility of automatic payment or ECS of any kind of instalment or bill from their bank account, then they will always have to maintain sufficient balance in the account from 1st August. If you do not do this, the payment or standing instruction will fail due to low balance.

It is to be known that under the current system, if there is not enough balance on Sunday, customers deposit money in their account on Monday, due to which instalment or bill is paid on Monday. However, after the introduction of this new facility from 1st August, this will not happen.

Credit offtake is at its lowest level due to Corona pandemic. For this reason, the interest rate of the loan is low. The bank has to keep a certain spread between the loan interest rate and the deposit rate, because only by doing so can the bank earn profits. In this arrangement the loan interest rate is high, and the deposit rate is low. Due to the low loan interest rate, the deposit rate is also at its lowest level at present. By the way, people wanting to buy a house or flat can take advantage of the low loan interest rate, as the real estate price is low right now. Due to affordable loans and low cost of flats or houses, 65 per cent people in the Mumbai Metropolitan Region (MMR) have bought big houses, while 85 per cent people in NCR have bought their first house during the Corona period.

According to KV Subramaniam, Chief Economic Adviser to the Central Government, the economy will start coming back on track from the month of July, as the number of people getting infected due to the second wave of corona virus has decreased significantly in the first week of June 2021. For this reason, the states are removing the lockdown in a phased manner. It is expected that by the month of July, the shortage of vaccines will be removed, and economic activities will also accelerate due to the speedy process of vaccination.

According to Shri KV Subramaniam, it is not possible to achieve the fiscal deficit and disinvestment target due to the second wave of corona pandemic. According to the data, the fiscal deficit for the financial year 2020-21 is estimated to be 9.3 percent of GDP, which is lower than the government’s earlier estimate of 9.5 percent. During this, the GDP was 7.3 percent, while in the fourth quarter of the financial year 2020-21, the GDP was 1.6 percent.

Recently there has been a significant increase in the stock market. According to Shri KV Subramaniam, the rise in the domestic stock market is a good sign for the economy. This confirms that even in the Corona epidemic, investor confidence remains intact. On June 3, the Sensex climbed 382 points to a record 52,232 and the Nifty closed at 15,690. The main reason for the growth of the market is the decreasing infection rate of the corona virus in the country and keeping the policy rates unchanged by the central bank in the previous monetary review.

The outbreak of the second wave of the corona epidemic is gradually decreasing. It is hoped that the situation will come under control by the last week of June. Therefore, economic activities can pick up from the month of July. Right now, the offtake of the loan is low. The credit growth rate of banks is as high as 5 to 6 percent, which is more than two digits in normal condition. Therefore, there was no justification for the central bank to cut the repo rate in the latest monetary review. If credit offtake picks up, the government may cut policy rates in the coming months.

(Author is Chief Manager at State Bank of India, Mumbai. The views expressed are personal opinion of the author. He can be reached at [email protected] and [email protected].)

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