RBI Monetary Policy 2021: What does RBI move to keep rates steady, hike inflation target mean?

Clipped from: https://indianexpress.com/article/explained/explained-what-does-rbi-move-to-keep-rates-steady-hike-inflation-target-mean-7441192/

The Reserve Bank of India’s Monetary Policy Committee raised the inflation target for fiscal 2001-22 but maintained the growth forecast at 9.5 per cent. We explain the decisions.

Written by George Mathew , Edited by Explained Desk

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Mumbai | Updated: August 6, 2021 12:42:30 pmrbi monetary policy, rbi repo rate unchanged, rbi inflation target, shaktikanta das, rbi mpc, rbi monetary policy 2021, rbi monetary policy announcementReserve Bank of India Governor Shaktikanta Das. (Express Photo: Prashant Nadkar, File)

RBI Monetary Policy 2021: After a three-day meeting, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday kept the key policy rate — Repo rate, or the RBI’s lending rate to banks — unchanged at four per cent for the seventh time in a row, and reverse repo rate — RBI’s borrowing rate from banks — at 3.35 per cent. The panel has also raised the inflation target for fiscal 2001-22 but maintained the growth forecast at 9.5 per cent.

Interest rates to remain steady:

The six-member MPC panel, headed by RBI Governor Shaktikanta Das, voted in favour keeping key policy rates unchanged and 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. The RBI panel says the nascent and hesitant recovery in the economy — which faced rough weather due to the Covid second wave and lockdowns in states — needs to be nurtured through fiscal, monetary and sectoral policy levers. Elevated inflation level and delayed recovery in the economy would have prompted the panel to keep rates steady. Interest rates in the banking system are expected to remain stable in the next couple of months.https://www.youtube.com/embed/5SCHDcJxbgo

Inflation target hiked:

The RBI panel has hiked the inflation target for fiscal 2021-22 to 5.7 per cent from 5.1 per cent projected earlier. Although the target is below the RBI’s upper band of inflation target of six per cent, input prices are rising across manufacturing and services sectors and weak demand and efforts towards cost cutting are tempering the pass-through to output prices. 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.https://images.indianexpress.com/2020/08/1×1.png

According to RBI Governor Shaktikanta Das, who unveiled the bi-monthly monetary policy, crude oil prices are volatile with implications for imported cost pressures on inflation. The combination of elevated prices of industrial raw materials, high pump prices of petrol and diesel with their second-round effects, and logistics costs continue to impinge adversely on cost conditions for manufacturing and services, although weak demand conditions are tempering the pass-through to output prices and core inflation. Inflation may remain close to the upper tolerance band up to Q2 of 2021-22, but these pressures should ebb in Q3 of 2021-22 on account of kharif harvest arrivals and as supply side measures take effect. Taking into consideration all these factors, CPI inflation is now projected at 5.9 per cent in Q2, 5.3 per cent in Q3 and 5.8 per cent in Q4 of 2021-22, with risks broadly balanced. Retail inflation for Q1 of 2022-23 is projected at 5.1 per cent.

Growth unchanged at 9.5 per cent in FY22:

The MPC has retained the real GDP growth at 9.5 per cent in 2021-22 consisting of 21.4 per cent in Q1, 7.3 per cent in Q2, 6.3 per cent in Q3 and 6.1 per cent in Q4 of 2021-22. Real GDP growth for Q1 of 2022-23 is projected at 17.2 per cent. 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, Das said.

Firms polled in the Reserve Bank’s surveys expect expansion in production volumes and new orders in Q2 of 2021-22 which would sustain through Q4 of 2021-22, auguring well for investment. Innovation and working models adopted during the pandemic by businesses will continue to reap efficiency and productivity gains even after the pandemic recedes. This should help trigger a virtuous cycle of investment, employment and growth. “Domestic economic activity has started normalising with the ebbing of the second wave of the virus and the phased reopening of the economy. High-frequency indicators suggest that consumption (both private and Government), investment and external demand are all on the path of regaining traction,” Das said.Don’t miss from Explained |Equity markets rising, where should you invest?

RBI Governor Shaktikanta Das optimistic:

Das said the recovery remains uneven across sectors and needs to be supported by all policy makers. The Reserve Bank remains in “whatever it takes” mode, with a readiness to deploy all its policy levers – monetary, prudential or regulatory, he said. “As the Covid-19 second wave ebbs, there is optimism that with adequate pandemic protocols and ramp-up in the vaccination rate, we should be able to tide over a third wave, if it occurs,” Das said.

“Our focus on preservation of financial stability continues. At this juncture, our overarching priority is that growth impulses are nurtured to ensure a durable recovery along a sustainable growth path with stability,” he said.

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Variable rate reverse repo to absorb Rs 4 lakh crore:

The RBI has now decided to conduct fortnightly variable reverse repo rate (VRRR) auctions of Rs 2.5 lakh crore on August 13, 2021, Rs 3.0 lakh crore on August 27, 2021, Rs 3.5 lakh crore on September 9, 2021 and Rs 4.0 lakh crore on September 24, 2021. “Fears that the recommencement of the VRRR is tantamount to liquidity tightening have been allayed. We have seen a higher appetite for VRRR in terms of the bid-cover ratio in the auctions,” Das said.

“These enhanced VRRR auctions should not be misread as a reversal of the accommodative policy stance, as the amount absorbed under the fixed rate reverse repo is expected to remain more than Rs 4.0 lakh crore at end September 2021. Needless to add that the amount accepted under the VRRR window forms part of system liquidity,” he said.

The RBI also proposes to conduct two more auctions of Rs 25,000 crore each on August 12 and August 26, 2021 under G-SAP 2.0.

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