Monetary Management and Financial Intermediation | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


CHAPTER
04
Monetary Management and 
Financial Intermediation
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 	
Page 2


CHAPTER
04
Monetary Management and 
Financial Intermediation
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 	
124 Economic Survey 2020-21   V olume 1
and	 the	 December 	 2020	 meetings 	 were 	 held 	 as 	 per 	 schedule, 	 while 	 the 	 October 	 meeting 	 was	
postponed by a week as new external members were onboarded to the MPC. Since March 
27, 	 2020, 	 the 	 policy	 repo 	 rate 	 has 	 been 	 reduced	 by	 1 15 	 basis	 points	 (bps) 	 from 	 5.15	 per 	 cent 	
to	 4.0	 per 	 cent 	 so 	 far 	 (T able	 1). 	 The	 monetary 	 policy	 responses 	 during 	 the 	 year 	 2020-21 	 were 	
necessitated 	by 	the 	extraordinary 	situation	prevailing	due 	to 	COVID-19. 	
Table 1: Revision in Policy Rates
Effective Date Repo Rate 
(per cent)
Reverse 
Repo Rate 
(per cent)
Cash Reserve 
Ratio (per cent 
of NDTL)
Statutory 
Liquidity Ratio 
(per cent of 
NDTL)
Bank Rate/ 
MSF Rate  
(per cent)
06-02-2020 5.15 4.9 4.0 18.25 5.4
27-03-2020 4.4 4.0 4.0 18.25 4.65
28-03-2020 4.4 4.0 3.0 18.25 4.65
17-04-2020 4.4 3.75 3.0 18.0 4.65
22-05-2020 4.0 3.35 3.0 18.0 4.25
Source:	RBI
Note: 	NDTL: 	Net	demand	and	time	liabilities
4.2	 In 	 its 	 first 	 bi-monthly 	 monetary 	 policy 	 statement 	 of 	 March 	 27, 	 2020, 	 the 	 MPC 	 decided 	 to	
reduce 	 the 	 policy 	 repo 	 rate 	 by 	 75 	 bps 	 from 	 5.15 	 per 	 cent 	 to 	 4.40 	 per 	 cent. 	 Alongside, 	 the 	 reverse	
repo 	 rate 	 was 	 reduced 	 by 	 90 	 bps 	 to 	 4.0 	 per 	 cent, 	 thus 	 creating 	 an 	 asymmetrical 	 corridor 	 to 	 make	
it 	 unattractive 	 for 	 banks 	 to 	 passively 	 deposit 	 funds 	 with 	 the 	 Reserve 	 Bank 	 and 	 nudge 	 them	
to 	 use 	 these 	 funds 	 for 	 on-lending 	 to 	 productive 	 sectors 	 of 	 the 	 economy . 	 The 	 MPC 	 decided 	 to	
continue 	 with 	 the 	 accommodative 	 stance 	 as 	 long 	 as 	 it 	 is 	 necessary 	 to 	 revive 	 growth 	 and 	 mitigate	
the 	 impact 	 of 	 COVID-19 	 on 	 the 	 economy . 	 In 	 the 	 second 	 meeting 	 in 	 May 	 2020, 	 MPC 	 reduced	
the policy repo rate by 40 bps to 4.0 per cent based on the assessment that the macroeconomic 
impact 	 of 	 the 	 pandemic 	 was 	 turning 	 out 	 to 	 be 	 more 	 severe 	 than 	 initially 	 anticipated. 	
4.3	 MPC 	 decided 	 to 	 keep 	 the 	 policy 	 rate 	 unchanged 	 in 	 its 	 August, 	 October 	 and 	 December 	 2020	
meetings. 	 While 	 the 	 inflation 	 hovered 	 above 	 the 	 tolerance 	 zone 	 for 	 a 	 few 	 months, 	 the 	 committee	
was 	 of 	 the 	 view 	 that 	 the 	 underlying 	 factors 	 keeping 	 inflation 	 elevated 	 were 	 essentially 	 supply	
shocks 	 that 	 should 	 dissipate 	 over 	 time 	 as 	 the 	 economy 	 unlocks, 	 supply 	 chains 	 restore 	 and 	 activity	
normalises. 	 RBI 	 in 	 its 	 latest 	 MPC 	 meeting 	 revised 	 upwards 	 the 	 projected 	 the 	 GDP 	 growth 	 from	
(-) 	 9.5 	 per 	 cent 	 to 	 (-) 	 7.5 	 per 	 cent 	 in 	 2020-21.
4.4	 During 	 2020-21, 	 the 	 growth 	 of 	 monetary 	 aggregates 	 witnessed 	 higher	 growth 	 as 	 compared 	
to	 previous 	 few 	 years	 on	 account 	 of 	 higher	 liquidity	 in 	 the 	 economy . 	 	 In 	 2020-21 	 so 	 far ,	 Reserve 	
money 	 (M0) 	 recorded 	 a 	 Y ear 	 on	 Y ear 	 (Y oY) 	 growth 	 of 	 15.2	 per 	 cent 	 as 	 on	 January 	 15,	 2021	
as	 compared 	 to 	 1 1.4 	 per 	 cent 	 a 	 year 	 ago. 	 However ,	 M0 	 adjusted 	 for 	 the 	 first-round 	 impact 	 of 	
changes 	 in 	 the 	 CRR 	 recorded 	 an 	 even 	 higher	 growth 	 (Y oY)	 of 	 19.2	 per 	 cent 	 as 	 compared 	 to 	
1 1.0	 per	 cent 	 a 	 year 	 ago 	 (Figure 	 1). 	 Expansion 	 in 	 M0 	 during 	 2020-21 	 was	 driven	 by	 currency 	
in	 circulation 	 (CIC) 	 from 	 the 	 component 	 side, 	 which 	 witnessed 	 a 	 sur ge 	 in 	 the 	 post-COVID-19 	
pandemic 	 period.	 The	 growth 	 (Y oY) 	 in 	 CIC 	 was 	 21.9	 per 	 cent 	 as 	 on	 January	 15,	 2021,	 as 	
compared 	to 	1 1.6 	per 	cent 	in 	the 	corresponding 	period	of 	previous 	year 	(T able 	2). 	.	
Page 3


CHAPTER
04
Monetary Management and 
Financial Intermediation
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 	
124 Economic Survey 2020-21   V olume 1
and	 the	 December 	 2020	 meetings 	 were 	 held 	 as 	 per 	 schedule, 	 while 	 the 	 October 	 meeting 	 was	
postponed by a week as new external members were onboarded to the MPC. Since March 
27, 	 2020, 	 the 	 policy	 repo 	 rate 	 has 	 been 	 reduced	 by	 1 15 	 basis	 points	 (bps) 	 from 	 5.15	 per 	 cent 	
to	 4.0	 per 	 cent 	 so 	 far 	 (T able	 1). 	 The	 monetary 	 policy	 responses 	 during 	 the 	 year 	 2020-21 	 were 	
necessitated 	by 	the 	extraordinary 	situation	prevailing	due 	to 	COVID-19. 	
Table 1: Revision in Policy Rates
Effective Date Repo Rate 
(per cent)
Reverse 
Repo Rate 
(per cent)
Cash Reserve 
Ratio (per cent 
of NDTL)
Statutory 
Liquidity Ratio 
(per cent of 
NDTL)
Bank Rate/ 
MSF Rate  
(per cent)
06-02-2020 5.15 4.9 4.0 18.25 5.4
27-03-2020 4.4 4.0 4.0 18.25 4.65
28-03-2020 4.4 4.0 3.0 18.25 4.65
17-04-2020 4.4 3.75 3.0 18.0 4.65
22-05-2020 4.0 3.35 3.0 18.0 4.25
Source:	RBI
Note: 	NDTL: 	Net	demand	and	time	liabilities
4.2	 In 	 its 	 first 	 bi-monthly 	 monetary 	 policy 	 statement 	 of 	 March 	 27, 	 2020, 	 the 	 MPC 	 decided 	 to	
reduce 	 the 	 policy 	 repo 	 rate 	 by 	 75 	 bps 	 from 	 5.15 	 per 	 cent 	 to 	 4.40 	 per 	 cent. 	 Alongside, 	 the 	 reverse	
repo 	 rate 	 was 	 reduced 	 by 	 90 	 bps 	 to 	 4.0 	 per 	 cent, 	 thus 	 creating 	 an 	 asymmetrical 	 corridor 	 to 	 make	
it 	 unattractive 	 for 	 banks 	 to 	 passively 	 deposit 	 funds 	 with 	 the 	 Reserve 	 Bank 	 and 	 nudge 	 them	
to 	 use 	 these 	 funds 	 for 	 on-lending 	 to 	 productive 	 sectors 	 of 	 the 	 economy . 	 The 	 MPC 	 decided 	 to	
continue 	 with 	 the 	 accommodative 	 stance 	 as 	 long 	 as 	 it 	 is 	 necessary 	 to 	 revive 	 growth 	 and 	 mitigate	
the 	 impact 	 of 	 COVID-19 	 on 	 the 	 economy . 	 In 	 the 	 second 	 meeting 	 in 	 May 	 2020, 	 MPC 	 reduced	
the policy repo rate by 40 bps to 4.0 per cent based on the assessment that the macroeconomic 
impact 	 of 	 the 	 pandemic 	 was 	 turning 	 out 	 to 	 be 	 more 	 severe 	 than 	 initially 	 anticipated. 	
4.3	 MPC 	 decided 	 to 	 keep 	 the 	 policy 	 rate 	 unchanged 	 in 	 its 	 August, 	 October 	 and 	 December 	 2020	
meetings. 	 While 	 the 	 inflation 	 hovered 	 above 	 the 	 tolerance 	 zone 	 for 	 a 	 few 	 months, 	 the 	 committee	
was 	 of 	 the 	 view 	 that 	 the 	 underlying 	 factors 	 keeping 	 inflation 	 elevated 	 were 	 essentially 	 supply	
shocks 	 that 	 should 	 dissipate 	 over 	 time 	 as 	 the 	 economy 	 unlocks, 	 supply 	 chains 	 restore 	 and 	 activity	
normalises. 	 RBI 	 in 	 its 	 latest 	 MPC 	 meeting 	 revised 	 upwards 	 the 	 projected 	 the 	 GDP 	 growth 	 from	
(-) 	 9.5 	 per 	 cent 	 to 	 (-) 	 7.5 	 per 	 cent 	 in 	 2020-21.
4.4	 During 	 2020-21, 	 the 	 growth 	 of 	 monetary 	 aggregates 	 witnessed 	 higher	 growth 	 as 	 compared 	
to	 previous 	 few 	 years	 on	 account 	 of 	 higher	 liquidity	 in 	 the 	 economy . 	 	 In 	 2020-21 	 so 	 far ,	 Reserve 	
money 	 (M0) 	 recorded 	 a 	 Y ear 	 on	 Y ear 	 (Y oY) 	 growth 	 of 	 15.2	 per 	 cent 	 as 	 on	 January 	 15,	 2021	
as	 compared 	 to 	 1 1.4 	 per 	 cent 	 a 	 year 	 ago. 	 However ,	 M0 	 adjusted 	 for 	 the 	 first-round 	 impact 	 of 	
changes 	 in 	 the 	 CRR 	 recorded 	 an 	 even 	 higher	 growth 	 (Y oY)	 of 	 19.2	 per 	 cent 	 as 	 compared 	 to 	
1 1.0	 per	 cent 	 a 	 year 	 ago 	 (Figure 	 1). 	 Expansion 	 in 	 M0 	 during 	 2020-21 	 was	 driven	 by	 currency 	
in	 circulation 	 (CIC) 	 from 	 the 	 component 	 side, 	 which 	 witnessed 	 a 	 sur ge 	 in 	 the 	 post-COVID-19 	
pandemic 	 period.	 The	 growth 	 (Y oY) 	 in 	 CIC 	 was 	 21.9	 per 	 cent 	 as 	 on	 January	 15,	 2021,	 as 	
compared 	to 	1 1.6 	per 	cent 	in 	the 	corresponding 	period	of 	previous 	year 	(T able 	2). 	.	
125 Monetary Management and Financial Intermediation
Table 2: Growth (YoY) in Monetary Aggregates (per cent)
 Item
2015-16 2016-17^ 2017-18 2018-19 2019-20
2020-21*
Currency 	in 	Circulation
14.9 –19.7 37.0 16.8 14.5 21.9
#
Cash with Banks
6.6 4.2
–2.1 21.4 15.4 6.6
Currency 	with 	the 	Public
15.2
–20.8 39.2 16.6 14.5 22.7
Bankers’ Deposits with the RBI
7.8 8.4 3.9 6.4 –9.6 –11.9
#
Demand Deposits
11.0
18.4 6.2 9.6 6.8 17.1
Time Deposits
9.2
10.2 5.8 9.6 8.1 10.1
Reserve Money (M0) 
13.1
–12.9
27.3 14.5 9.4 15.2
#
Narrow Money (M1)
13.5
–3.9 21.8 13.6 11.2 20.5
Broad Money (M3) 10.1 6.9 9.2 10.5 8.9 12.5
Source:	RBI
Note: 	 *:	 as 	 on	 January	 01,2021.	 ^:	 March 	 31,	 2017	 over 	 April	 1,	 2016	 barring	 Reserve	 Money	 (M0), 	 Currency	 in	
Circulation 	and	Bankers’ 	Deposits	with	the	RBI.		
#
as 	on	January 	15,	2021
Figure 1: M0, CRR Adjusted M0 and CIC Growth (YoY)
	 Source: 	RBI
4.5	 Among 	 the 	 sources 	 of 	 M0 	 –	 comprising	 of 	 net 	 domestic 	 assets 	 (NDA) 	 [net	 Reserve 	 Bank 	
credit	 to 	 the 	 government, 	 banks 	 and 	 commercial 	 sector] 	 and 	 net 	 foreign 	 assets 	 (NF A) 	 - 	 the 	
main	 driver 	 for 	 increase 	 in 	 M0 	 during 	 2020-21 	 was	 NF A, 	 attributable	 to 	 the 	 Reserve 	 Bank’ s 	
net	 purchases 	 from 	 Authorised 	 Dealers 	 (ADs). 	 Net 	 Reserve 	 Bank 	 credit 	 to 	 the 	 government 	 has 	
been	 lower 	 during 	 2020-21 	 so 	 far 	 vis-à-vis 	 the 	 corresponding 	 period	 of 	 the 	 previous 	 year 	 due 	
to	 higher 	 cash 	 balances 	 of 	 the 	 central 	 government 	 with 	 the 	 RBI. 	 Among	 other	 constituents 	 of 	
NDA,	 net 	 Reserve 	 Bank 	 claims 	 on	 banks 	 and 	 the 	 commercial 	 sector 	 (mainly 	 Primary 	 Dealers 	
(PDs))	 lar gely 	 remained 	 in 	 the 	 negative 	 territory , 	 reflecting 	 surplus 	 liquidity 	 in 	 the 	 system 	 (more 	
details	on 	this	is 	provided	in 	following 	section). 	
4.6	 In	 2020-21 	 so 	 far 	 (as 	 on	 January	 1,	 2021), 	 the 	 Y oY 	 growth 	 of 	 Broad 	 Money 	 (M3)	 stood 	 at 	
12.5	 per 	 cent, 	 as 	 compared 	 to 	 10.1	 per 	 cent 	 in 	 the 	 corresponding 	 period	 a 	 year 	 ago 	 (Figure 	 2). 	
The 	 significant 	 rise 	 in 	 reserve 	 money 	 has 	 not 	 translate d 	 into 	 a 	 commensurate 	 increase 	 in 	 money 	
supply	 as 	 the 	 money 	 multip lier 	 has 	 remained 	 depressed 	 due 	 to 	 a 	 sharp 	 rise 	 in 	 currency-deposit	
ratio,	and 	also 	lar ge 	amount	of 	funds 	parked 	under 	reverse 	repos 	with 	RBI. 	
Page 4


CHAPTER
04
Monetary Management and 
Financial Intermediation
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 	
124 Economic Survey 2020-21   V olume 1
and	 the	 December 	 2020	 meetings 	 were 	 held 	 as 	 per 	 schedule, 	 while 	 the 	 October 	 meeting 	 was	
postponed by a week as new external members were onboarded to the MPC. Since March 
27, 	 2020, 	 the 	 policy	 repo 	 rate 	 has 	 been 	 reduced	 by	 1 15 	 basis	 points	 (bps) 	 from 	 5.15	 per 	 cent 	
to	 4.0	 per 	 cent 	 so 	 far 	 (T able	 1). 	 The	 monetary 	 policy	 responses 	 during 	 the 	 year 	 2020-21 	 were 	
necessitated 	by 	the 	extraordinary 	situation	prevailing	due 	to 	COVID-19. 	
Table 1: Revision in Policy Rates
Effective Date Repo Rate 
(per cent)
Reverse 
Repo Rate 
(per cent)
Cash Reserve 
Ratio (per cent 
of NDTL)
Statutory 
Liquidity Ratio 
(per cent of 
NDTL)
Bank Rate/ 
MSF Rate  
(per cent)
06-02-2020 5.15 4.9 4.0 18.25 5.4
27-03-2020 4.4 4.0 4.0 18.25 4.65
28-03-2020 4.4 4.0 3.0 18.25 4.65
17-04-2020 4.4 3.75 3.0 18.0 4.65
22-05-2020 4.0 3.35 3.0 18.0 4.25
Source:	RBI
Note: 	NDTL: 	Net	demand	and	time	liabilities
4.2	 In 	 its 	 first 	 bi-monthly 	 monetary 	 policy 	 statement 	 of 	 March 	 27, 	 2020, 	 the 	 MPC 	 decided 	 to	
reduce 	 the 	 policy 	 repo 	 rate 	 by 	 75 	 bps 	 from 	 5.15 	 per 	 cent 	 to 	 4.40 	 per 	 cent. 	 Alongside, 	 the 	 reverse	
repo 	 rate 	 was 	 reduced 	 by 	 90 	 bps 	 to 	 4.0 	 per 	 cent, 	 thus 	 creating 	 an 	 asymmetrical 	 corridor 	 to 	 make	
it 	 unattractive 	 for 	 banks 	 to 	 passively 	 deposit 	 funds 	 with 	 the 	 Reserve 	 Bank 	 and 	 nudge 	 them	
to 	 use 	 these 	 funds 	 for 	 on-lending 	 to 	 productive 	 sectors 	 of 	 the 	 economy . 	 The 	 MPC 	 decided 	 to	
continue 	 with 	 the 	 accommodative 	 stance 	 as 	 long 	 as 	 it 	 is 	 necessary 	 to 	 revive 	 growth 	 and 	 mitigate	
the 	 impact 	 of 	 COVID-19 	 on 	 the 	 economy . 	 In 	 the 	 second 	 meeting 	 in 	 May 	 2020, 	 MPC 	 reduced	
the policy repo rate by 40 bps to 4.0 per cent based on the assessment that the macroeconomic 
impact 	 of 	 the 	 pandemic 	 was 	 turning 	 out 	 to 	 be 	 more 	 severe 	 than 	 initially 	 anticipated. 	
4.3	 MPC 	 decided 	 to 	 keep 	 the 	 policy 	 rate 	 unchanged 	 in 	 its 	 August, 	 October 	 and 	 December 	 2020	
meetings. 	 While 	 the 	 inflation 	 hovered 	 above 	 the 	 tolerance 	 zone 	 for 	 a 	 few 	 months, 	 the 	 committee	
was 	 of 	 the 	 view 	 that 	 the 	 underlying 	 factors 	 keeping 	 inflation 	 elevated 	 were 	 essentially 	 supply	
shocks 	 that 	 should 	 dissipate 	 over 	 time 	 as 	 the 	 economy 	 unlocks, 	 supply 	 chains 	 restore 	 and 	 activity	
normalises. 	 RBI 	 in 	 its 	 latest 	 MPC 	 meeting 	 revised 	 upwards 	 the 	 projected 	 the 	 GDP 	 growth 	 from	
(-) 	 9.5 	 per 	 cent 	 to 	 (-) 	 7.5 	 per 	 cent 	 in 	 2020-21.
4.4	 During 	 2020-21, 	 the 	 growth 	 of 	 monetary 	 aggregates 	 witnessed 	 higher	 growth 	 as 	 compared 	
to	 previous 	 few 	 years	 on	 account 	 of 	 higher	 liquidity	 in 	 the 	 economy . 	 	 In 	 2020-21 	 so 	 far ,	 Reserve 	
money 	 (M0) 	 recorded 	 a 	 Y ear 	 on	 Y ear 	 (Y oY) 	 growth 	 of 	 15.2	 per 	 cent 	 as 	 on	 January 	 15,	 2021	
as	 compared 	 to 	 1 1.4 	 per 	 cent 	 a 	 year 	 ago. 	 However ,	 M0 	 adjusted 	 for 	 the 	 first-round 	 impact 	 of 	
changes 	 in 	 the 	 CRR 	 recorded 	 an 	 even 	 higher	 growth 	 (Y oY)	 of 	 19.2	 per 	 cent 	 as 	 compared 	 to 	
1 1.0	 per	 cent 	 a 	 year 	 ago 	 (Figure 	 1). 	 Expansion 	 in 	 M0 	 during 	 2020-21 	 was	 driven	 by	 currency 	
in	 circulation 	 (CIC) 	 from 	 the 	 component 	 side, 	 which 	 witnessed 	 a 	 sur ge 	 in 	 the 	 post-COVID-19 	
pandemic 	 period.	 The	 growth 	 (Y oY) 	 in 	 CIC 	 was 	 21.9	 per 	 cent 	 as 	 on	 January	 15,	 2021,	 as 	
compared 	to 	1 1.6 	per 	cent 	in 	the 	corresponding 	period	of 	previous 	year 	(T able 	2). 	.	
125 Monetary Management and Financial Intermediation
Table 2: Growth (YoY) in Monetary Aggregates (per cent)
 Item
2015-16 2016-17^ 2017-18 2018-19 2019-20
2020-21*
Currency 	in 	Circulation
14.9 –19.7 37.0 16.8 14.5 21.9
#
Cash with Banks
6.6 4.2
–2.1 21.4 15.4 6.6
Currency 	with 	the 	Public
15.2
–20.8 39.2 16.6 14.5 22.7
Bankers’ Deposits with the RBI
7.8 8.4 3.9 6.4 –9.6 –11.9
#
Demand Deposits
11.0
18.4 6.2 9.6 6.8 17.1
Time Deposits
9.2
10.2 5.8 9.6 8.1 10.1
Reserve Money (M0) 
13.1
–12.9
27.3 14.5 9.4 15.2
#
Narrow Money (M1)
13.5
–3.9 21.8 13.6 11.2 20.5
Broad Money (M3) 10.1 6.9 9.2 10.5 8.9 12.5
Source:	RBI
Note: 	 *:	 as 	 on	 January	 01,2021.	 ^:	 March 	 31,	 2017	 over 	 April	 1,	 2016	 barring	 Reserve	 Money	 (M0), 	 Currency	 in	
Circulation 	and	Bankers’ 	Deposits	with	the	RBI.		
#
as 	on	January 	15,	2021
Figure 1: M0, CRR Adjusted M0 and CIC Growth (YoY)
	 Source: 	RBI
4.5	 Among 	 the 	 sources 	 of 	 M0 	 –	 comprising	 of 	 net 	 domestic 	 assets 	 (NDA) 	 [net	 Reserve 	 Bank 	
credit	 to 	 the 	 government, 	 banks 	 and 	 commercial 	 sector] 	 and 	 net 	 foreign 	 assets 	 (NF A) 	 - 	 the 	
main	 driver 	 for 	 increase 	 in 	 M0 	 during 	 2020-21 	 was	 NF A, 	 attributable	 to 	 the 	 Reserve 	 Bank’ s 	
net	 purchases 	 from 	 Authorised 	 Dealers 	 (ADs). 	 Net 	 Reserve 	 Bank 	 credit 	 to 	 the 	 government 	 has 	
been	 lower 	 during 	 2020-21 	 so 	 far 	 vis-à-vis 	 the 	 corresponding 	 period	 of 	 the 	 previous 	 year 	 due 	
to	 higher 	 cash 	 balances 	 of 	 the 	 central 	 government 	 with 	 the 	 RBI. 	 Among	 other	 constituents 	 of 	
NDA,	 net 	 Reserve 	 Bank 	 claims 	 on	 banks 	 and 	 the 	 commercial 	 sector 	 (mainly 	 Primary 	 Dealers 	
(PDs))	 lar gely 	 remained 	 in 	 the 	 negative 	 territory , 	 reflecting 	 surplus 	 liquidity 	 in 	 the 	 system 	 (more 	
details	on 	this	is 	provided	in 	following 	section). 	
4.6	 In	 2020-21 	 so 	 far 	 (as 	 on	 January	 1,	 2021), 	 the 	 Y oY 	 growth 	 of 	 Broad 	 Money 	 (M3)	 stood 	 at 	
12.5	 per 	 cent, 	 as 	 compared 	 to 	 10.1	 per 	 cent 	 in 	 the 	 corresponding 	 period	 a 	 year 	 ago 	 (Figure 	 2). 	
The 	 significant 	 rise 	 in 	 reserve 	 money 	 has 	 not 	 translate d 	 into 	 a 	 commensurate 	 increase 	 in 	 money 	
supply	 as 	 the 	 money 	 multip lier 	 has 	 remained 	 depressed 	 due 	 to 	 a 	 sharp 	 rise 	 in 	 currency-deposit	
ratio,	and 	also 	lar ge 	amount	of 	funds 	parked 	under 	reverse 	repos 	with 	RBI. 	
126 Economic Survey 2020-21   V olume 1
Figure 2: Broad money growth (YoY)
  
	 Source: 	RBI
4.7	 From 	 the 	 component 	 side, 	 aggregate 	 deposits 	 which 	 is 	 the 	 lar gest 	 component 	 has 	 contributed	
most	 in	 the 	 expansion 	 of 	 M3 	 during 	 the 	 year 	 so 	 far	 (Figure 	 3). 	 Amongst 	 sources, 	 bank 	 credit 	
to	 the	 government 	 was	 a 	 major 	 contributor 	 to 	 the 	 increase 	 in 	 M3. 	 Banks’ 	 higher	 investments 	 in 	
liquid	 and 	 risk-free 	 assets 	 such 	 as 	 SLR 	 securities 	 and 	 G-secs, 	 resulted 	 in 	 higher	 net 	 bank 	 credit 	
to	 the	 government. 	 Bank 	 credit 	 to 	 the 	 commercial 	 sector 	 also 	 supplemented	 M3 	 expansion	 from 	
the	 sources 	 side. 	 The	 credit 	 growth 	 of 	 SCBs 	 (Y oY) 	 was	 6.7	 per 	 cent 	 as 	 on	 January	 1,	 2021	 as 	
compared 	to 	7.5 	per 	cent 	at 	the 	corresponding 	time 	a 	year 	ago. 	
Figure 3: Deposits growth (YoY)
	 Source: 	RBI
4.8	 Money 	 multiplier , 	 measured 	 as 	 a 	 ratio 	 of 	 M3/M0 	 which 	 was 	 mostly 	 increasing	 from 	 1980s 	
onwards 	 up	 to 	 2016-17, 	 has 	 however 	 been 	 declining 	 since	 then. 	 As 	 on	 March 	 31,	 2020,	 the 	
Page 5


CHAPTER
04
Monetary Management and 
Financial Intermediation
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 	
124 Economic Survey 2020-21   V olume 1
and	 the	 December 	 2020	 meetings 	 were 	 held 	 as 	 per 	 schedule, 	 while 	 the 	 October 	 meeting 	 was	
postponed by a week as new external members were onboarded to the MPC. Since March 
27, 	 2020, 	 the 	 policy	 repo 	 rate 	 has 	 been 	 reduced	 by	 1 15 	 basis	 points	 (bps) 	 from 	 5.15	 per 	 cent 	
to	 4.0	 per 	 cent 	 so 	 far 	 (T able	 1). 	 The	 monetary 	 policy	 responses 	 during 	 the 	 year 	 2020-21 	 were 	
necessitated 	by 	the 	extraordinary 	situation	prevailing	due 	to 	COVID-19. 	
Table 1: Revision in Policy Rates
Effective Date Repo Rate 
(per cent)
Reverse 
Repo Rate 
(per cent)
Cash Reserve 
Ratio (per cent 
of NDTL)
Statutory 
Liquidity Ratio 
(per cent of 
NDTL)
Bank Rate/ 
MSF Rate  
(per cent)
06-02-2020 5.15 4.9 4.0 18.25 5.4
27-03-2020 4.4 4.0 4.0 18.25 4.65
28-03-2020 4.4 4.0 3.0 18.25 4.65
17-04-2020 4.4 3.75 3.0 18.0 4.65
22-05-2020 4.0 3.35 3.0 18.0 4.25
Source:	RBI
Note: 	NDTL: 	Net	demand	and	time	liabilities
4.2	 In 	 its 	 first 	 bi-monthly 	 monetary 	 policy 	 statement 	 of 	 March 	 27, 	 2020, 	 the 	 MPC 	 decided 	 to	
reduce 	 the 	 policy 	 repo 	 rate 	 by 	 75 	 bps 	 from 	 5.15 	 per 	 cent 	 to 	 4.40 	 per 	 cent. 	 Alongside, 	 the 	 reverse	
repo 	 rate 	 was 	 reduced 	 by 	 90 	 bps 	 to 	 4.0 	 per 	 cent, 	 thus 	 creating 	 an 	 asymmetrical 	 corridor 	 to 	 make	
it 	 unattractive 	 for 	 banks 	 to 	 passively 	 deposit 	 funds 	 with 	 the 	 Reserve 	 Bank 	 and 	 nudge 	 them	
to 	 use 	 these 	 funds 	 for 	 on-lending 	 to 	 productive 	 sectors 	 of 	 the 	 economy . 	 The 	 MPC 	 decided 	 to	
continue 	 with 	 the 	 accommodative 	 stance 	 as 	 long 	 as 	 it 	 is 	 necessary 	 to 	 revive 	 growth 	 and 	 mitigate	
the 	 impact 	 of 	 COVID-19 	 on 	 the 	 economy . 	 In 	 the 	 second 	 meeting 	 in 	 May 	 2020, 	 MPC 	 reduced	
the policy repo rate by 40 bps to 4.0 per cent based on the assessment that the macroeconomic 
impact 	 of 	 the 	 pandemic 	 was 	 turning 	 out 	 to 	 be 	 more 	 severe 	 than 	 initially 	 anticipated. 	
4.3	 MPC 	 decided 	 to 	 keep 	 the 	 policy 	 rate 	 unchanged 	 in 	 its 	 August, 	 October 	 and 	 December 	 2020	
meetings. 	 While 	 the 	 inflation 	 hovered 	 above 	 the 	 tolerance 	 zone 	 for 	 a 	 few 	 months, 	 the 	 committee	
was 	 of 	 the 	 view 	 that 	 the 	 underlying 	 factors 	 keeping 	 inflation 	 elevated 	 were 	 essentially 	 supply	
shocks 	 that 	 should 	 dissipate 	 over 	 time 	 as 	 the 	 economy 	 unlocks, 	 supply 	 chains 	 restore 	 and 	 activity	
normalises. 	 RBI 	 in 	 its 	 latest 	 MPC 	 meeting 	 revised 	 upwards 	 the 	 projected 	 the 	 GDP 	 growth 	 from	
(-) 	 9.5 	 per 	 cent 	 to 	 (-) 	 7.5 	 per 	 cent 	 in 	 2020-21.
4.4	 During 	 2020-21, 	 the 	 growth 	 of 	 monetary 	 aggregates 	 witnessed 	 higher	 growth 	 as 	 compared 	
to	 previous 	 few 	 years	 on	 account 	 of 	 higher	 liquidity	 in 	 the 	 economy . 	 	 In 	 2020-21 	 so 	 far ,	 Reserve 	
money 	 (M0) 	 recorded 	 a 	 Y ear 	 on	 Y ear 	 (Y oY) 	 growth 	 of 	 15.2	 per 	 cent 	 as 	 on	 January 	 15,	 2021	
as	 compared 	 to 	 1 1.4 	 per 	 cent 	 a 	 year 	 ago. 	 However ,	 M0 	 adjusted 	 for 	 the 	 first-round 	 impact 	 of 	
changes 	 in 	 the 	 CRR 	 recorded 	 an 	 even 	 higher	 growth 	 (Y oY)	 of 	 19.2	 per 	 cent 	 as 	 compared 	 to 	
1 1.0	 per	 cent 	 a 	 year 	 ago 	 (Figure 	 1). 	 Expansion 	 in 	 M0 	 during 	 2020-21 	 was	 driven	 by	 currency 	
in	 circulation 	 (CIC) 	 from 	 the 	 component 	 side, 	 which 	 witnessed 	 a 	 sur ge 	 in 	 the 	 post-COVID-19 	
pandemic 	 period.	 The	 growth 	 (Y oY) 	 in 	 CIC 	 was 	 21.9	 per 	 cent 	 as 	 on	 January	 15,	 2021,	 as 	
compared 	to 	1 1.6 	per 	cent 	in 	the 	corresponding 	period	of 	previous 	year 	(T able 	2). 	.	
125 Monetary Management and Financial Intermediation
Table 2: Growth (YoY) in Monetary Aggregates (per cent)
 Item
2015-16 2016-17^ 2017-18 2018-19 2019-20
2020-21*
Currency 	in 	Circulation
14.9 –19.7 37.0 16.8 14.5 21.9
#
Cash with Banks
6.6 4.2
–2.1 21.4 15.4 6.6
Currency 	with 	the 	Public
15.2
–20.8 39.2 16.6 14.5 22.7
Bankers’ Deposits with the RBI
7.8 8.4 3.9 6.4 –9.6 –11.9
#
Demand Deposits
11.0
18.4 6.2 9.6 6.8 17.1
Time Deposits
9.2
10.2 5.8 9.6 8.1 10.1
Reserve Money (M0) 
13.1
–12.9
27.3 14.5 9.4 15.2
#
Narrow Money (M1)
13.5
–3.9 21.8 13.6 11.2 20.5
Broad Money (M3) 10.1 6.9 9.2 10.5 8.9 12.5
Source:	RBI
Note: 	 *:	 as 	 on	 January	 01,2021.	 ^:	 March 	 31,	 2017	 over 	 April	 1,	 2016	 barring	 Reserve	 Money	 (M0), 	 Currency	 in	
Circulation 	and	Bankers’ 	Deposits	with	the	RBI.		
#
as 	on	January 	15,	2021
Figure 1: M0, CRR Adjusted M0 and CIC Growth (YoY)
	 Source: 	RBI
4.5	 Among 	 the 	 sources 	 of 	 M0 	 –	 comprising	 of 	 net 	 domestic 	 assets 	 (NDA) 	 [net	 Reserve 	 Bank 	
credit	 to 	 the 	 government, 	 banks 	 and 	 commercial 	 sector] 	 and 	 net 	 foreign 	 assets 	 (NF A) 	 - 	 the 	
main	 driver 	 for 	 increase 	 in 	 M0 	 during 	 2020-21 	 was	 NF A, 	 attributable	 to 	 the 	 Reserve 	 Bank’ s 	
net	 purchases 	 from 	 Authorised 	 Dealers 	 (ADs). 	 Net 	 Reserve 	 Bank 	 credit 	 to 	 the 	 government 	 has 	
been	 lower 	 during 	 2020-21 	 so 	 far 	 vis-à-vis 	 the 	 corresponding 	 period	 of 	 the 	 previous 	 year 	 due 	
to	 higher 	 cash 	 balances 	 of 	 the 	 central 	 government 	 with 	 the 	 RBI. 	 Among	 other	 constituents 	 of 	
NDA,	 net 	 Reserve 	 Bank 	 claims 	 on	 banks 	 and 	 the 	 commercial 	 sector 	 (mainly 	 Primary 	 Dealers 	
(PDs))	 lar gely 	 remained 	 in 	 the 	 negative 	 territory , 	 reflecting 	 surplus 	 liquidity 	 in 	 the 	 system 	 (more 	
details	on 	this	is 	provided	in 	following 	section). 	
4.6	 In	 2020-21 	 so 	 far 	 (as 	 on	 January	 1,	 2021), 	 the 	 Y oY 	 growth 	 of 	 Broad 	 Money 	 (M3)	 stood 	 at 	
12.5	 per 	 cent, 	 as 	 compared 	 to 	 10.1	 per 	 cent 	 in 	 the 	 corresponding 	 period	 a 	 year 	 ago 	 (Figure 	 2). 	
The 	 significant 	 rise 	 in 	 reserve 	 money 	 has 	 not 	 translate d 	 into 	 a 	 commensurate 	 increase 	 in 	 money 	
supply	 as 	 the 	 money 	 multip lier 	 has 	 remained 	 depressed 	 due 	 to 	 a 	 sharp 	 rise 	 in 	 currency-deposit	
ratio,	and 	also 	lar ge 	amount	of 	funds 	parked 	under 	reverse 	repos 	with 	RBI. 	
126 Economic Survey 2020-21   V olume 1
Figure 2: Broad money growth (YoY)
  
	 Source: 	RBI
4.7	 From 	 the 	 component 	 side, 	 aggregate 	 deposits 	 which 	 is 	 the 	 lar gest 	 component 	 has 	 contributed	
most	 in	 the 	 expansion 	 of 	 M3 	 during 	 the 	 year 	 so 	 far	 (Figure 	 3). 	 Amongst 	 sources, 	 bank 	 credit 	
to	 the	 government 	 was	 a 	 major 	 contributor 	 to 	 the 	 increase 	 in 	 M3. 	 Banks’ 	 higher	 investments 	 in 	
liquid	 and 	 risk-free 	 assets 	 such 	 as 	 SLR 	 securities 	 and 	 G-secs, 	 resulted 	 in 	 higher	 net 	 bank 	 credit 	
to	 the	 government. 	 Bank 	 credit 	 to 	 the 	 commercial 	 sector 	 also 	 supplemented	 M3 	 expansion	 from 	
the	 sources 	 side. 	 The	 credit 	 growth 	 of 	 SCBs 	 (Y oY) 	 was	 6.7	 per 	 cent 	 as 	 on	 January	 1,	 2021	 as 	
compared 	to 	7.5 	per 	cent 	at 	the 	corresponding 	time 	a 	year 	ago. 	
Figure 3: Deposits growth (YoY)
	 Source: 	RBI
4.8	 Money 	 multiplier , 	 measured 	 as 	 a 	 ratio 	 of 	 M3/M0 	 which 	 was 	 mostly 	 increasing	 from 	 1980s 	
onwards 	 up	 to 	 2016-17, 	 has 	 however 	 been 	 declining 	 since	 then. 	 As 	 on	 March 	 31,	 2020,	 the 	
127 Monetary Management and Financial Intermediation
money	 multip lier 	 was	 5.5,	 slightly 	 lower 	 than 	 5.6	 a 	 year 	 earlier . 	 However ,	 adjusted 	 for 	 reverse 	
repo	 -	 analyti cally 	 akin 	 to 	 banks’ 	 deposits 	 with 	 the 	 central 	 bank 	 –	 Money 	 Multiplier 	 turned	 out 	
to	 be 	 even 	 lower 	 at 	 4.8	 by	 end-March 	 2020. 	 Money 	 multiplier	 has 	 declined 	 from 	 the 	 recent 	
peak	 of	 5.8	 in 	 October 	 2018	 to 	 5.5	 as 	 on	 January	 1,	 2021	 (Figure 	 4). 	 In 	 comparison, 	 during 	
the	 same 	 period,	 money 	 multiplier 	 adjusted 	 for 	 reverse 	 repo 	 has 	 declined 	 sharply 	 from 	 5.7	 to 	
4.5.	 This 	 shows	 that	 the 	 money 	 supply 	 has 	 responded	 only 	 partially 	 to 	 reserve 	 money 	 growth, 	
reflecting 	 that	 the 	 liquidity 	 transmission 	 in 	 the 	 economy 	 remains 	 impaired.	 The 	 gap 	 between 	
money	 multip lier 	 and 	 adjusted 	 money 	 reflected 	 the 	 lar ge 	 amount	 of 	 funds 	 parked 	 by	 banks 	 under 	
reverse repo window by RBI. 
Figure 4: Money Multiplier
	 Source: 	RBI
	 Note: Money 	 multiplier	 adjusted	 for	 repo 	 means	 that	 the	 reserve	 money	 includes 	 commercial	 banks’ 	 reverse	
repo deposits with RBI 
LIQUIDITY CONDITIONS AND ITS MANAGEMENT
4.9	 The 	 systemic 	 liquidity 	 in 	 2020-21 	 so 	 far 	 has 	 consistently 	 remained 	 in 	 surplus 	 reflecting 	
several 	 liquidity 	 enhancing 	 measures 	 undertaken 	 by 	 the 	 Reserve 	 Bank 	 in 	 the 	 wake 	 of	
COVID-19 	 induced 	 disruptions. 	 The 	 main 	 drivers 	 of 	 liquidity 	 during 	 2020-21 	 have 	 been	
Currency 	 in 	 Circulation 	 (CIC), 	 Government 	 cash 	 balances 	 and 	 the 	 Reserve 	 Bank’ s 	 forex	
operations. 	 While 	 CIC 	 withdrawals 	 and 	 build-up 	 of 	 Government 	 cash 	 balances 	 resulted 	 in	
liquidity 	drainage 	from 	the 	banking 	system, 	the 	Reserve 	Bank’ s 	forex 	operations 	augmented	
systemic 	 liquidity .	
4.10	 Reserve 	 Bank 	 undertook 	 several 	 conventional 	 and 	 unconventional 	 measures 	 to 	 manage 	
the	 liquidity 	 in 	 the 	 economy 	 starting	 from 	 February	 2020.	 These 	 measures, 	inter alia, 	 included: 	
	 i.	 Injection 	 of 	 durable 	 liquidity 	 of 	 more	 than 	` 2.7 	 lakh 	 crore 	 through 	 Open 	 Market 	
Operation 	(OMO) 	purchases 	between 	February 	6-December 	4,	2020.