First RBI Monetary Policy 2021-2022

 



The Monetary Policy Decision was announced today by the Reserve Bank of India (RBI) Governor Shaktikanta Das at the end of the scheduled review of the Monetary Policy Committee (MPC) that began on Monday.

Key Highlights:

  • Ø      GDP Growth Forecast maintained at 10.5%
  • Ø       Repo rate maintained at 4%.
  • Ø       Reverse repo rate unchained at 3.5%
  • Ø       MSF BK Rate unchanged at 4.25%


What is RBI's Monetary Policy?

Monetary policy refers to the policy of the central bank (RBI) regarding the use of monetary instruments under its control to achieve the goals specified in the Act. The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.

The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC (Monetary Policy Committee) in formulating the monetary policy. Views of key stakeholders in the economy, and analytical work of the Reserve Bank contributes to the process for arriving at the decision on the policy repo rate.

The Financial Market Committee (FMC) meets daily to review the liquidity conditions to ensure that the operating target of monetary policy (weighted average lending rate) is kept close to the policy repo rate.    

 

What is Monetary Policy Committee (MPC)?

The Monetary Policy Committee is responsible for setting the benchmark interest rate in India. Monetary Policy Committee meetings are held at least 4 times a year (especially, at least once BIMONTHLY) and it publishes its decisions after each meeting.

The committee consists of six members - three officials of the Reserve Bank of India and three external members nominated by the Government of India. They are required to observe a "silent period" seven days before and after the rate decision for "utmost secrecy". The Governor of the Reserve Bank of India is the ex-officio Chairman of the Committee. The decision is taken after the governor has a decisive vote in terms of voting in case of a majority.

Current MPC Members are:

1.     Shaktikanta Das: Governor of the Reserve Bank of India

2.     Michael Debrata Patra: Deputy Governor of the Bank in charge of monetary policy

3.     M K Saggar: Executive director of the Bank in charge of monetary policy

4.     Ashima Goyal: Member of Prime Minister’s economic advisory council

5.     Shashanka Bhide: Senior Advisor at the National Council for Applied Economic Research

6.     Jayanth Varma: Finance and Accounting professor at the IIM, Ahmedabad


What are the Repo rate and Reverse Repo Rate?

Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in India if they face a shortage of funds. Commercial banks sell government securities and bonds to the Reserve Bank of India at a pre-determined price, including interest, to repay securities and bonds from the Reserve Bank of India on a certain date in the future.

The reverse repo rate is the rate at which the Reserve Bank of India borrows money from commercial banks in the country. In other words, it is the rate at which commercial banks in India park their surplus funds with the Reserve Bank of India, usually for the short term.


Assessment of Growth and Inflation as per new RBI Policy :

Growth:

  • Ø  Global growth is slowly recovering from the recession, but it remains uneven across the country and is supported by ongoing vaccination drives, continued adjustment monetary policies and further fiscal stimulus.
  • Ø  World production is projected by the Organization for Economic Cooperation and Development (OECD) to reach its pre-pandemic level by mid-2021.
  • Ø  In the domestic economy, the focus should now be on virus prevention as well as an economic revival - consolidating the gains achieved so far and sustaining growth impulses in the new financial year (2021–22).
  • Ø  The focus of the Union Budget 2021-22 on investment-led measures with increased allocation for capital expenditure; Extended Production Linked Incentive (PLI) Scheme; And increasing capacity utilization (from Q2: 63-21 percent in Q2: 2020-21 to 66.6 percent in Q3: 2020-21) will strengthen the process of economic revival.
  • Ø  The recent upsurge in the COVID-19 transition, however, adds uncertainty to the outlook for domestic development amid tightening of sanctions by some state governments. In India, we are now better prepared to face the challenges posed by this revival in transition.
  • Ø  The projection of real GDP growth for 2021–22 remains at 10.5 percent, ranging from 26.2 percent in Q1; 8.3 percent in Q2; 5.4 percent in Q3; And 6.2 percent in Q4.

Inflation:

  • Ø  While the headline inflation remains within the tolerance band at 5.0 percent in February 2021, some underlying constituents are testing the upper tolerance level.
  • Ø  The food inflation trajectory will depend critically on the temporal and spatial progression of the southwest monsoon. The projection of CPI inflation has been revised to 5.0 percent in Q4: 2020-21; 5.2 percent in Q1: 2021-22; 5.2 percent in Q2; 4.4 percent in Q3; And 5.1 percent in Q4, broadly balanced, with risks.
  • Ø  On March 31, 2021, the government maintained the inflation target at 4 percent for the next five years (April 2021 – March 2026), with lower and upper tolerance levels of 2 percent and 6 percent, respectively. In the medium term, the inflation rate of 4 percent has now successfully come in the economic scenario.


RBI Monetary Policy Highlights:

Repo Rate, Reverse Repo Rate: The RBI MPC has decided to keep the repo rate unchanged at 4 percent even after rising COVID-19 cases, banning, and lockdown in the state of Maharashtra. The reverse repo rate changed to 3.35 percent and the marginal standing facility (MSF) rate and the bank rate to 4.25 percent.

Growth Projection: Due to the ongoing vaccination program and investment-growth and growth-supportive reform measures are taken by the government, the projection of real GDP growth for FY 2012 remains at 10.5 percent. For each quarter, the RBI sees real GDP growth of 26.2 percent in the first quarter (April-June); 8.3 percent in Q2 (Jul-Sep); 5.4 percent in Q3 (October – December); And 6.2 percent in Q4 (Jan-Mar).

Inflation: RBI has revised the projection for CPI inflation to 5 percent in the January-March a quarter of FY 21; 5.2 percent in the April-June quarter, 5.2 percent in the Jul-Sep quarter; 4.4 percent in the October-December quarter; And 5.1 percent in the January-March quarter of FY22.

Liquidity: During April-August 2020, All India Financial Institutions (AIFIs) such as NABARD (National Bank for Agriculture and Rural Development), Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB), and EXIM Bank received Special refinance facilities of Rs.75,000 crores.

First purchase of government securities under G-SAP: The Monetary Policy Committee announced a G-SAP acquisition program of ₹ 1 lakh crore for the first quarter of this financial year. The first purchase of government securities under G-SAP 1.0 for the amount of ₹ 25,000 crores will be conducted on April 15, 2021.

TLTRO Scheme Expansion: The RBI Governor announced that the On-Target Long Term Repo Operations (TLTRO) scheme, available till 31 March 2021, has now been extended to 30 September 2021 for a period of six months to ensure adequate liquidity support to the economy.

NEFT, RGTS system can be extended beyond banks: RBI Governor Shaktikanta Das announced during monetary policy review that centralized payment systems like NEFT and RGTS will be extended beyond banks. Additionally, the distinction between full-KYC PPIs has been made mandatory, and cash withdrawals have been allowed by full-KYC PPIs issued by non-bank users.

Increase in the limit for payment banks: In an effort to promote digital transactions, RBI has proposed to increase the limit in payment bank wallets from Rs 1 lakh to Rs 2 lakh.

Setting Up Panel to Review Asset Reconstruction Companies: The central bank proposed a comprehensive review of the functioning of asset reconstruction companies (ARCs) and constituted a committee to meet the growing needs of the financial sector of these institutions. ARCs play an important role in the resolution of stressed areas.

 

Alpha Eye Thoughts:

The first bi-monthly monetary policy for FY22 is on the expected lines as the RBI has kept the repo rate unchanged. The key point is that the central bank has kept the FY22 growth trajectory unchanged at 10.5% and expressed confidence that despite the boom in COVID cases, the vaccination the program can be accelerated and expanded to wider population areas The increase of the maximum balance of accounts created with Payments Bank should help in deepening financial inclusion of individual customer and should cater to the growing banking needs of account holders of payment banks.

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