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 RBI Monetary Policy Highlights: Repo rate cut on hold; Shaktikanta Das unveils liquidity, stimulus measures 

In a statement that sets out various developmental and regulatory policy measures to enhance liquidity support for financial markets and other stakeholders, the resolution of the Monetary Policy Committee (MPC) of RBI on Thursday stated about easing of financial stress caused by COVID-19 disruptions through liquidity management, regulation and supervision, financial inclusions and payments and settlements.Some measures include strengthening credit discipline to improve the flow of credit, deepen digital payments, augment customer safety in cheque payments, and facilitate innovation across the financial sector by leveraging on technology through an Innovation Hub. 

Here are the five major highlights of the Monetary Policy Statement: 

REVISED PRIORITY SECTOR LENDING TO INCLUDE START-UPS 

The struggling startup community in India, currently facing a liquidity crunch, is pinning hopes on a revival after the Reserve Bank of India (RBI) announced that it will broaden the scope of Priority Sector Lending (PSL) to include them too.The announcement came after the RBI Governor Shantikanta Das called for a “policy-reorientation” to help startups that were facing funding challenges due to the COVID pandemic. Das had acknowledged that it has become imperative to re-orient the policy focus to aid the startups that would be critical for employment generation and overall economic growth.

DEBT RESTRUCTURING TO HELP INDIAN COMPANIES TO TIDE OVER COVID-19 CRISIS 

The RBI’s plan to allow one-time debt restructuring and setting up an expert committee headed by former banker K V Kamath for corporate and personal loans resolution will provide much-needed relief to Indian companies once the moratorium on loans ends this month.A host of Indian companies led by airlines, hotels, travel and tourism, real estate and media are expected to fall into a financial crisis, as their cash flows dried up due to the nationwide lockdown announced by the Indian government to contain the Coronavirus pandemic.

INNOVATION HUB FOR THE FINANCE SECTOR 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,” said the statement.The statement further informed about the Regulatory Sandbox framework being one such recent initiative in which Digital Payments were the first cohort. Six proposals were accepted under the Sandbox, the pilot studies/trials of which have been delayed on account of the present COVID-19 situation. Areas such as cybersecurity, data analytics, delivery platforms, payments services, etc., remain at the forefront when we think of innovation in the financial sector.The statement added that the Innovation Hub will support, promote, and hand-hold cross-thinking “spanning regulatory remits and national boundaries.”

RESTRUCTURING OF MSME DEBT 

Recognising the need for continued support to MSMEs’ meaningful restructuring, it has been decided that, in respect of MSME borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may restructure the debt under the existing framework, provided the borrower’s account was classified as standard with the lender as on March 1, 2020. This restructuring shall be implemented by March 31, 2021.

LOAN RESTRUCTURING MOVE TO PROVIDE A BREATHER TO REAL ESTATE 

The RBI’s decision to extend a one-time restructuring term loans with up to 2 years moratorium is expected to provide a breather to stressed real estate developers and individual borrowers in the housing segment alike. The one-time restructuring of loans without classifying them as non-performing assets (NPAs) will be based on the recommendation of the expert committee steered by KV Kamath, said RBI. The central bank has also announced further liquidity infusion to the tune of Rs 5000 Crores to National Housing Board (NHB) which should be able to provide some relief during these times of crisis.“In order to shield the housing sector from liquidity disruptions under the prevailing conditions and augment the flow of finance to the sector, it has been decided to provide an additional standing liquidity facility (ASLF) of ₹5,000 crore to NHB – over and above ₹10,000 crores already provided – for supporting housing finance companies (HFCs). The facility will be for a period of one year and will be charged at the RBI’s repo rate, ” read the statement.  
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Balance Of Payment (BOP) is a statement which records all the monetary transactions made between residents of a country and the rest of the world during any given period. This statement includes all the transactions made by/to individuals, corporates and the government and helps in monitoring the flow of funds to develop the economy. When all the elements are correctly included in the BOP, it should sum up to zero in a perfect scenario. This means the inflows and outflows of funds should balance out. However, this does not ideally happen in most cases.BOP statement of a country indicates whether the country has a surplus or a deficit of funds i.e when a country’s export is more than its import, its BOP is said to be in surplus. On the other hand, BOP deficit indicates that a country’s imports are more than its exports. Tracking the transactions under BOP is something similar to the double entry system of accounting. This means, all the transaction will have a debit entry and a corresponding credit entry.

A country’s BOP is vital for the following reasons:

• BOP of a country reveals its financial and economic status.
• BOP statement can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.
• BOP statement helps the Government to decide on fiscal and trade policies.
• It provides important information to analyze and understand the economic dealings of a country with other countries.

By studying its BOP statement and its components closely, one would be able to identify trends that may be beneficial or harmful to the economy of the county and thus, then take appropriate measures.

There are three components of balance of payment viz current account, capital account, and financial account. The total of the current account must balance with the total of capital and financial accounts in ideal situations.  

The current account is used to monitor the inflow and outflow of goods and services between countries. This account covers all the receipts and payments made with respect to raw materials and manufactured goods. It also includes receipts from engineering, tourism, transportation, business services, stocks, and royalties from patents and copyrights. When all the goods and services are combined, together they make up to a country’s Balance Of Trade (BOT).There are various categories of trade and transfers which happen across countries. It could be visible or invisible trading, unilateral transfers or other payments/receipts. Trading in goods between countries are referred to as visible items and import/export of services (banking, information technology etc) are referred to as invisible items. Unilateral transfers refer to money sent as gifts or donations to residents of foreign countries. This can also be personal transfers like –  money sent by relatives to their family located in another country.

All capital transactions between the countries are monitored through the capital account. Capital transactions include the purchase and sale of assets (non-financial) like land and properties. The capital account also includes the flow of taxes, purchase and sale of fixed assets etc by migrants moving out/in to a different country. The deficit or surplus in the current account is managed through the finance from capital account and vice versa.There are 3 major elements of capital account:

• Loans & borrowings – It includes all types of loans from both the private and public sectors located in foreign countries.
• Investments – These are funds invested in the corporate stocks by non-residents.
• Foreign exchange reserves – Foreign exchange reserves held by the central bank of a country to monitor and control the exchange rate does impact the capital account.  

The flow of funds from and to foreign countries through various investments in real estates, business ventures, foreign direct investments etc is monitored through the financial account. This account measures the changes in the foreign ownership of domestic assets and domestic ownership of foreign assets. On analyzing these changes, it can be understood if the country is selling or acquiring more assets (like gold, stocks, equity etc).

if for the year 2018 the value of exported goods from India is Rs. 80 lakhs and the value of imported items to India is 100 lakhs, then India has a trade deficit of Rs. 20 lakhs for the year 2018.BOP statement acts as an economic indicator to identify the trade deficit or surplus situation of a country. Analyzing and understanding the BOP of a country goes beyond just deducting the outflows of funds from inflows. As mentioned above, there are various components of BOP and fluctuations in these accounts which provide a clear indication about which sector of the economy needs to be developed.
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