scorecardresearch
Follow Us:
Wednesday, June 23, 2021

Explained: Behind RBI’s decision to keep repo rate unchanged

RBI's panel said forecast of a normal south-west monsoon, the resilience of agriculture and the farm economy, the adoption of Covid-19 compatible operational models by businesses, were among forces that could provide tailwinds to revival of domestic economic activity.

Written by George Mathew , Edited by Explained Desk
Mumbai | Updated: June 4, 2021 10:27:55 pm
RBI Governor Shaktikanta Das at the central bank office in New DelhiRBI Governor Shaktikanta Das at the central bank office in New Delhi. File/Express Photo by Tashi Tobgyal

With Covid pandemic impacting the near-term outlook of the economy, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday kept the key lending rate, or the repo rate, unchanged at 4 per cent for the sixth time in a row and slashed the growth rate to 9.5 per cent for fiscal 2021-22 after a three-day meeting.

What prompted the central bank to hold the rates?

The policy panel of the RBI said the second wave of Covid-19 has altered the near-term outlook, necessitating urgent policy interventions, active monitoring and further timely measures to prevent emergence of supply chain bottlenecks and build-up of retail margins. Policy support from all sides – fiscal, monetary and sectoral – is required to nurture recovery and expedite return to normalcy.

Newsletter | Click to get the day’s best explainers in your inbox

Accordingly, the MPC decided to retain the prevailing repo rate at 4 per cent and 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 panel said. The central bank also kept reverse repo rate – the RBI borrowing rate from banks — under the liquidity adjustment facility (LAF) unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.

Why has the growth rate been slashed?

The central bank has scaled down the FY22 (2021-22) gross domestic product (GDP) growth to 9.5 per cent as against the previous projection of 10.5 per cent. Urban demand has been dented by the second wave, but adoption of new Covid-compatible occupational models by businesses for an appropriate working environment may cushion the hit to economic activity, especially in manufacturing and services sectors that are not contact intensive. On the other hand, the strengthening global recovery should support the export sector.

The panel said domestic monetary and financial conditions remain highly accommodative and supportive of economic activity. Moreover, the vaccination process is expected to gather steam in the coming months and should help to normalise economic activity quickly. Taking these factors into consideration, real GDP growth is now projected at 9.5 per cent in 2021-22, consisting of 18.5 per cent in the first quarter (Q1), 7.9 per cent in Q2, 7.2 per cent in Q3 and 6.6 per cent in Q4:2021-22

What is the RBI observation on the economy?

The central bank’s panel said the forecast of a normal south-west monsoon, the resilience of agriculture and the farm economy, the adoption of Covid compatible operational models by businesses, and the gathering momentum of global recovery are forces that can provide tailwinds to revival of domestic economic activity when the second wave abates.

📣 JOIN NOW 📣: The Express Explained Telegram Channel

On the other hand, the spread of Covid-19 infections in rural areas and the dent on urban demand pose downside risks. Ramping up the vaccination drive and bridging the gaps in healthcare infrastructure and vital medical supplies can mitigate the pandemic’s devastation. The rural demand remains strong and the expected normal monsoon bodes well for sustaining its buoyancy, going forward.

What does the RBI say about inflation?

The panel has projected the retail inflation at 5.1 per cent – within the RBI’s inflation band of plus/minus four per cent — during 2021-22. Further, it has forecast 5.2 per cent in Q1, 5.4 per cent in Q2, 4.7 per cent in Q3 and 5.3 per cent in Q4 of 2021-22 with risks broadly balanced.

According to the MPC, going forward, the inflation trajectory is likely to be shaped by uncertainties impinging on the upside and the downside. The rising trajectory of international commodity prices, especially of crude, together with logistics costs, pose upside risks to the inflation outlook. Excise duties, cess and taxes imposed by the Centre and States need to be adjusted in a coordinated manner to contain input cost pressures emanating from petrol and diesel prices. A normal south-west monsoon along with comfortable buffer stocks should help to keep cereal price pressures in check.

Further, recent supply side interventions are expected to ameliorate the tightness in the pulses market. Further supply side measures are needed to soften pressures on pulses and edible oil prices. With declining infections, restrictions and localised lockdowns across states could ease gradually and mitigate disruptions to supply chains, reducing cost pressures. Weak demand conditions may also temper the pass-through to core inflation, the MPC said.

What are the RBI’s plans on the liquidity front?

The RBI said it will continue to conduct regular operations for liquidity management. It has decided to conduct another operation under G-SAP (government securities acquisition programme) for purchase of G-Secs of Rs 40,000 crore on June 17, 2021. Of this, Rs 10,000 crore would constitute purchase of state development loans (SDLs). It has also been decided to undertake another G-SAP in Q2 of 2021-22 and conduct secondary market purchase operations of Rs 1.20 lakh crore to support the market.

During the current year so far, the Reserve Bank has undertaken regular open market operations and injected additional liquidity to the tune of Rs 36,545 crore (up to May 31) in addition to Rs 60,000 crore under the first G-SAP. A purchase and sale auction under operation twist has also been conducted on May 6, 2021 to facilitate the smooth evolution of the yield curve.

📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

For all the latest Explained News, download Indian Express App.

  • The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.
0 Comment(s) *
* The moderation of comments is automated and not cleared manually by indianexpress.com.
Advertisement
Advertisement
Advertisement
Advertisement