Monetary Policy Review of RBI

In News 

• Recently, the Monetary Policy Committee (MPC) of the RBI  based on an assessment of the current macroeconomic situation kept key policy rates, including repo and reverse repo rates unchanged .

Rationale behind Keeping Policy Rate unchanged

• The MPC decided by a majority of 5 to 1 to 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-19 on the economy, while ensuring that inflation remains within the target going forward.
• The RBI is likely to wait for some more time as the economic recovery is uneven and the Omicron variant has dented the sentiment.

Major Highlights 

• No change in Repo rate:
  • The central bank has retained the repo rate at 4 per cent to boost growth. 
    • This means banks won’t hike lending and deposit rates and EMIs on loans will remain unchanged.

• Reverse repo rate unchanged:

• The RBI has retained the reverse repo rate at 3.35 per cent. 

• Marginal Standing Facility (MSF): 

• It also retained the marginal standing facility (MSF) rate and kept the Bank Rate unchanged at 4.25 per cent.

• Inflation to moderate:
  • The RBI has projected a 5.3 per cent consumer price (retail) inflation for the current financial year 2021-22 (FY22) despite rising crude oil prices.
    • Retail inflation for the next fiscal (FY23) is projected at 4.5 per cent, below the earlier projections.
  • Inflation is likely to moderate in the first half of 2022-23 and move closer to the target rate, thereafter providing room to remain accommodative.
    • Timely and opposite supply-side measures from the government have substantially helped contain inflationary pressures.

• Growth forecast:
  • The central bank has projected the real GDP growth at 7.8 percent for the next financial year (2022-23) while real GDP growth at 9.2 per cent for 2021-22 takes it modestly above the level of GDP in 2019-20.

Risk Highlighted 

• The MPC flagged the potential downside risks to economic activity from the highly contagious Omicron variant. 
  • Reassuringly, the symptoms have remained relatively mild and the pace of infections is moderating as quickly as it surged.
• There is, however, some loss of momentum in economic activity as reflected in high-frequency indicators such as purchasing managers’ indices for both manufacturing and services, finished steel consumption and sales of tractors, two-wheelers and passenger vehicles.

Way Ahead 

• RBI will continue to focus on smooth completion of the government borrowing programme, market participants also have a stake in the orderly evolution of financial conditions and the yield curve.
• It is expected that market participants will engage responsibly and contribute to cooperative outcomes that benefit all.
• The RBI is likely to follow a gentle approach to the normalization and ultimately withdrawal of monetary support unlike Western central banks that have switched to a hyper-aggressive mode.

Source:IE