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Indian Economy

Monetary Policy Report

  • 10 Apr 2020
  • 4 min read

Why in News

  • The Reserve Bank of India (RBI) has released its Monetary Policy Report (MPR).
  • The report follows the unscheduled monetary policy meeting held in end March, 2020 to discuss the uncertainties arising from the nationwide lockdown.
    • Since the review was conducted in end March, 2020, the early policy review, scheduled for April,2020 was withdrawn.

Key Points

  • Inflation
    • The consumer price index (CPI)-based inflation, had stayed elevated in the last few months. It is expected to decrease during the course of the financial year.
    • CPI inflation is tentatively projected to ease from 4.8% in (Quarter)Q1 of 2020-21 to 4.4% in Q2, 2.7% in Q3 and 2.4% in Q4.
      • This may be due to the prevailing high uncertainty.
        • Aggregate demand may weaken further than currently anticipated and ease core inflation further.
        • Supply bottlenecks could increase pressures more than expected.
    • Estimates indicate that inflation could move in a range of 3.6-3.8% assuming a normal monsoon and no major exogenous or policy shocks.
  • The RBI monetary policy:
  • However, the RBI refrained from making any prediction on growth. Forecasts for real Gross Domestic Product (GDP) growth in India were not provided due to prevailing uncertainties due to Covid-19.
  • Improvements in inflation and growth are expected to emanate from monetary, fiscal and other policy measures and the early containment of Covid-19. However, there are uncertainties with these factors.
  • Oil Price Drop
    • The sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade.
    • However, the gain from this channel is not expected to offset the impact of shutdown and loss of external demand.
  • Exchange Rates
    • The global financial market volatility caused by the uncertainty of macroeconomic impact of the Covid-19, as in February-March 2020, could exert pressure on the Indian rupee.
    • Should the rupee depreciate by 5% from the baseline, inflation could increase by around 20 bps while GDP growth could be higher by about 15 bps through increased net exports.
    • In contrast, should Covid-19 normalise quickly, strong capital flows could revive.
    • An appreciation of the rupee by 5% could moderate inflation by around 20 bps and GDP growth by around 15 bps vis-a-vis the baseline.

Monetary Policy

  • The Reserve Bank of India (RBI) uses monetary policy to control inflation, interest rates, supply of money and credit availability.
  • The RBI has a government-constituted Monetary Policy Committee (MPC) which is tasked with framing monetary policy using tools like the repo rate, reverse repo rate, bank rate, Cash Reserve Ratio (CRR).
  • The repo rate, also known as the policy rate, is the interest rate at which the RBI provides loans to banks.
  • The reverse repo is the rate at which commercial banks park their money with the central bank.
  • Bank rate is the rate charged by the RBI for lending funds to commercial banks.
  • Cash Reserve Ratio: Banks are required to hold a certain proportion of their deposits in the form of cash. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR.

Source: TH

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