Following the Union Budget that has assumed the burden of pulling up the economy, the Reserve Bank of India’s Monetary Policy Committee on Friday voted unanimously to hold the policy repo rate at 4 per cent, and take the first steps to roll back some of its Covid-time measures.

After a year of shouldering the burden of kick starting growth, the central bank is now moving to a supportive role by promising an accommodative stance for as long as necessary, and ensuring ample liquidity to sustain the recovery.

Balancing act

The RBI has been doing a fine balancing act between supporting growth, which is recovering from the impact of the pandemic, and tackling core inflation (retail inflation excluding food and fuel) pressures.

“Given that inflation has returned within the tolerance band (of 4 per cent +/- 2 per cent), the MPC judged that the need of the hour is to continue to support growth, assuage the impact of Covid-19 and return the economy to a higher growth trajectory,” said RBI Governor Shaktikanta Das.

As the first step to rollback Covid-time measures, the RBI, on a review of monetary and liquidity conditions, decided to gradually restore the cash reserve ratio (CRR).

This will be in two phases in a non-disruptive manner — to 3.5 per cent of deposits effective from March 27, and 4 per cent from May 22. Das emphasised that systemic liquidity would continue to remain comfortable over the ensuing year. The CRR normalization opens up space for a variety of market operations of the RBI to inject additional liquidity, he added.

To help banks tide over the disruption caused by Covid-19, the CRR was reduced from 4 per cent to 3 per cent of their deposits for a year, effective from the reporting fortnight beginning March 28, 2020.

The RBI tried to soften the possible impact of the restoration in CRR by announcing continuation of the relaxation in the marginal standing facility for six more months — up to September 30, 2021.

This will provide comfort to banks (to the extent of Rs. 1.53-lakh crore) on their liquidity requirements.

Govt borrowing

The RBI decided to extend the dispensation of parking Government Securities (G-Secs) and State Development Loans (SDLs), acquired between April 1, 2021 and March 31, 2022, in the enhanced HTM (held to maturity) investment bucket up to March 31, 2023.

The benefit of this enhanced HTM limit, whereby banks can park G-Secs and SDLs equal to 22 per cent of their deposits, is that they need not provide for investment depreciation.