Page 496 - ES 2020-21_Volume-1-2 [28-01-21]

04

Monetary Management and

Financial Intermediation CHAPTER

Given the unprecedented shock of COVID-19 pandemic, monetary policy was significantly
eased from March 2020 onwards. The repo rate has been cut by 115 bps since March 2020,
with 75 bps cut in first Monetary Policy Committee (MPC) meeting in March 2020 and 40
bps cut in second meeting in May 2020. The policy rates were kept unchanged in further
meetings, but the liquidity support was significantly enhanced. Systemic liquidity in 2020-
21 remained in surplus so far. RBI undertook various conventional and unconventional
measures like Open Market Operations, Long Term Repo Operations, Targeted Long Term
Repo Operations etc. to manage liquidity situation in the economy. The financial flows to the
real economy however remained constrained on account of subdued credit growth by both
banks and Non-Banking Financial Corporations. The higher reserve money growth did not
fully translate into commensurate money supply growth due to the lower (adjusted) money
multiplier reflecting large deposits by banks with RBI under reverse repo. Credit growth of
banks slowed down to 6.7 per cent as on January 1,2021. The credit offtake from banking
sector witnessed a broad based slowdown in 2020-21. Gross Non Performing Assets ratio
of Scheduled Commercial Banks decreased from 8.21 per cent at the end of March 2020 to
7.49 per cent at the end of September 2020. However, this has to be seen in conjunction with
the asset classification relief provided to borrowers on account of the pandemic. Capital to
risk-weighted asset ratio of Scheduled Commercial Banks increased from 14.7 per cent to
15.8 per cent between March 2020 and September 2020 with improvement in both Public
and Private sector banks. This year saw improvement in transmission of policy repo rates
to deposit and lending rates, as reflected in the decline of 94 bps and 67 bps in Weighted
Average Lending Rate on fresh rupee loans and outstanding rupee loans respectively from
March 2020 to November 2020. Similarly, the Weighted Average Domestic Term Deposit
Rate declined by 81 bps during the same period. Nifty50 and S&P BSE Sensex reached
record high closing of 14,644.7 and 49,792.12 on January 20,2021 respectively during
2020-21. The recovery rate for the Scheduled Commercial Banks through IBC (since
its inception) has been over 45 per cent. In view of COVID-19 pandemic, initiation of
Corporate Insolvency Resolution Process (CIRP) was suspended for any default arising
on or after March 25, 2020 for a period of 6 months. This was further extended twice for
3 months on September 24, 2020 and December 22, 2020. The suspension along with
continued clearance has allowed a small decline in accumulated cases.

MONETARY DEVELOPMENTS DURING 2020-21

4.1 The Monetary Policy Committee (MPC) of the Reserve Bank met five times since March
2020. In view of the COVID-19 pandemic, the MPC advanced its first two meetings of 2020-21
from first week of April to end March and from first week of June to May, 20-22. The August