Bi-monthly monetary policy review of RBI

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    Recently, The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted unanimously to maintain the status quo with regard to the policy repo rate and by a majority of 5 to 1 to retain the accommodative policy stance. 

    • It indicated the unwinding of the accommodative policy as the economy shows signs of emerging from the impact of the Covid-19 pandemic.
      • This process has to be gradual, calibrated and non-disruptive while remaining supportive of the economic recovery”. 

    About Monetary Policy Committee (MPC)

    • Constituted by RBI under section 45ZB of the Reserve Bank of India (RBI) Act, 1934.
    • Chaired by the Governor of RBI. 
    • Mission: Fixing the benchmark policy interest rate (repo rate) to restrain inflation within the particular target level (2% to 6%)
    • MPC conducts meetings at least 4 times a year. 
    • The monetary policy is published after every meeting with each member explaining his opinions.

    The objectives behind the move

    • RBI will continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid on the economy. 
      • It will spur strong enough economic growth to reduce unemployment or to prevent unemployment from rising.
    • It may help in neutralising the adverse impact of COVID-19 on the economy.

    Major Points 

    • The Monetary Policy Committee (MPC) kept the repo rate unchanged at 4 percent, the reverse repo rate at 3.35 per cent, and the marginal standing facility (MSF) rate and bank rate at 4.25 per cent in the bi-monthly monetary policy review.
    • RBI has discontinued the government securities acquisition programme (G-SAP) as part of liquidity normalisation. 
      • The central bank pumped Rs 2.37 lakh crore through various market operations including G-SAP in the first six months of the current year to revive the economy.
    • The RBI has slashed the inflation forecast for 2021-22 to 5.3 per cent from the 5.7 per cent estimated earlier
    • The RBI has retained the projection for real GDP growth at 9.5 per cent in 2021- 22, consisting of 7.9 percent in Q2 of the current year
    • CPI inflation for Q1:2022-23 is projected at 5.2%. 

    Issues and Challenges 

    • Output is still below pre-pandemic level and the recovery remains uneven and dependent upon continued policy support.
    • According to the RBI, even as the domestic economy is showing signs of mending, the external environment is turning more uncertain and challenging, with headwinds from slowing growth in some major Asian and advanced economies.
    • A steep jump in natural gas prices in the recent weeks, and concerns emanating from the normalisation of monetary policy in some major advanced economies

    Conclusion and way forward 

    • The ongoing domestic recovery needs to be nurtured assiduously through all policy channels. 
    • The MPC will remain watchful given the uncertainties surrounding the outlook for growth and inflation.
    • The substantial acceleration in the pace of vaccination, the sustained lowering of new infections and the coming festival season should support a rebound in the pent-up demand for contact intensive services, strengthen the demand for non-contact intensive services, and bolster urban demand.
    • RBI would ensure adequate liquidity to support the process of economic recovery.  
    • The Reserve Bank will continue to support the market in ensuring an orderly completion of the borrowing programme of the Government.

    What is Policy Rate/ Repo Rate and other terms mentioned above?

    • Repo Rate: It 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. 
      • Repo stands for ‘repurchase option’ or ‘repurchase agreement’.
      • The central bank provides these short term loans against securities such as treasury bills or government bonds.
      • It is commonly known as Policy Rate too.
      • Repo rate is used by monetary authorities to control inflation.
      • The government increases the repo rate when they need to control prices and restrict borrowings. 
      • On the other hand, the repo rate is decreased when there is a need to infuse more money into the market and support economic growth.
    • Reverse Repo Rate: This is the rate the central bank of a country pays its commercial banks to park their excess funds in the central bank.
      • The reverse repo rate provided by RBI is generally lower than the repo rate.
      • While repo rate is used to regulate liquidity in the economy, reverse repo rate is used to control cash flow in the market. 
      • When there is inflation in the economy, RBI increases the reverse repo rate.
        • It encourages commercial banks to make deposits in the central bank and earn returns.
    • Marginal Standing Facility: MSF or marginal standing facility is a system of the Reserve Bank of India that allows scheduled commercial banks to avail funds overnight.
      • It was introduced by the RBI as a provision for banks to avail overnight funds during a revision of the country’s monetary policy in 2011-12.
      • It is usually higher than the repo rate.
      • Banks can use their SLR or statutory liquidity ratio to take loans under MSF. 
        • This is a short-term loan used to maintain the liquidity of banks.
    • Consumer Price Index (CPI) Inflation: 
      • It measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.
      • It also represents retail inflation.
      • In India, five types of CPI are published.

    CPI Type

    Published by

    Remark

    CPI-Urban 

    National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.

    Measures Urban Retail Inflation.

    Combined with CPI Rural to produce Overall CPI.

    CPI Rural

    National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.

    Measures Rural Retail Inflation.

    CPI for Industrial Workers (IW)

    Labour Bureau in the Ministry of Labour and Employment

    Used for determining dearness allowance (DA), fixation and revision of minimum wages in scheduled employments.

    CPI for Agricultural Labourer (AL)

    Labour Bureau in the Ministry of Labour and Employment

    Used to fix minimum wages of agricultural labourers.

    CPI for Rural Labourer (RL)

    Labour Bureau in the Ministry of Labour and Employment

    Used to fix minimum wages of rural unskilled employees

    Source: IE