Monetary Policy Report: RBI

• 10 Aug 2021

Why in News

The Reserve Bank of India (RBI) has released the Monetary Policy Report (MPR) for the month of August 2021.

• It kept the policy rate unchanged for the seventh time in a row. And appealed to the centre and states to reduce taxes on fuels to curb inflationary pressures.

Monetary Policy Report

• The MPR is published by the Monetary Policy Committee (MPC) of RBI.
• The MPC is a statutory and institutionalized framework under the RBI Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.
• The MPC determines the policy interest rate (repo rate) required to achieve the inflation target of 4% with a leeway of 2% points on either side.
• The Governor of RBI is ex-officio Chairman of the MPC.

Key Points

• Unchanged Policy Rates:
  
  • Repo Rate - 4%.
  • Reverse Repo Rate - 3.35%.
  • Marginal Standing Facility (MSF) - 4.25%.
  • Bank Rate- 4.25%.
• GDP Projection:
  
  • Real Gross Domestic Product (GDP) growth for 2021-22 has been retained at 9.5%.
• Inflation:.
  
  • RBI has revised the projection for Consumer Price Index (CPI) inflation to 5.7% from 5.1%.
• Variable Rate Reverse Repos:
  
  • In order to absorb additional liquidity in the system, the RBI announced conducting a Variable Rate Reverse Repo (VRRR) program due to the higher yield prospects as compared to the fixed rate overnight reverse repo.
    
    • The RBI has decided to increase the quantum under the VRRR to Rs 4 trillion in a phased manner.
  • It also extended the liquidity support to banks to lend to stressed businesses by another three months to 31th December 2021.
• Interest Rates:
  
  • Elevated inflation level and delayed recovery in the economy has prompted the panel to keep rates steady. Interest rates in the banking system are expected to remain stable in the next couple of months.
    
    • Recovery faced rough weather due to the Covid second wave and lockdowns in states
• Accommodative Stance:
  
  • It decided to continue with an accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.
    
    • An accommodative stance means a central bank will cut rates to inject money into the financial system whenever needed.
• Optimism For Recovery:
  
  • Resilient Demand:
    
    • After the second wave of infections, domestic economic activity had started to recover with accelerated vaccination.
  • Economic Package:
    
    • Although investment demand is still anaemic, improving capacity utilisation, rising steel consumption, higher imports of capital goods, congenial monetary and financial conditions and the economic packages announced by the central government are expected to kick-start a long-awaited revival.
  • High Frequency Indicators:
    
    • High-frequency indicators (electricity consumption, nighttime lights intensity and nitrogen dioxide emissions) suggest that consumption (both private and Government), investment and external demand are all on the path of regaining traction.
• Concerns:
  
  • Inflation management can pose a serious challenge when the elevated fuel price pass through starts to occur and thus inflation shock is unlikely to be transitory even by definition.
• Suggestions:
  
  • Reduce Taxes:
    
    • With crude oil prices at elevated levels, a calibrated reduction of the indirect tax component of pump prices by the centre and states can help to substantially lessen cost pressures.
  • Economic Stimulus:
    
    • On the economic front, despite the uptick, it is important that a stimulus is provided by the government to give a thrust to consumption. The timing of such measures will be apt at this juncture as the festive season is about to begin.
  • Policy Use:
    
    • The nascent and hesitant recovery in the economy needs to be nurtured through fiscal, monetary and sectoral policy levers.

Key Terms

• Repo and Reverse Repo Rate:
  
  • Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security.
  • Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.
• Bank Rate:
  
  • It is the rate charged by the RBI for lending funds to commercial banks.
• Marginal Standing Facility (MSF):
  
  • MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.
  • Under interbank lending, banks lend funds to one another for a specified term.
• Inflation:
  
  • Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
  • Inflation measures the average price change in a basket of commodities and services over time.
  • Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
• Consumer Price Index:
  
  • It measures price changes from the perspective of a retail buyer. It is released by the National Statistical Office (NSO).
  • The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.

Source: IE