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RBI’s Second Bi-Monthly Monetary Policy 2021, GDP Growth To Be 9.5 Percent

No Change In Repo Rate, An Upswing In Exports In March-May 2021

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Raju Vernekar
Raju Vernekar
I am a mumbai based journalist having worked with many daily newspapers.

INDIA. Mumbai:  Reserve Bank of India (RBI) kept the repo rate unchanged at 4 percent while maintaining an ‘accommodative stance’ as long as necessary to mitigate the impact of the COVID-19 pandemic in its second bi-monthly Monetary Policy report on Friday.

All members of the RBI’s Monetary Policy Committee (MPC)-Dr. Shashank Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Mridul K. Saggar, Dr. Michael Debabrata Patra, and RBI Governor Shaktikanta Das- unanimously voted to keep the policy repo rate unchanged at 4.0 percent. Besides all the members unanimously voted 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 and keep inflation at the targeted level, the RBI statement said.

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RBI Governor Shaktikanta Das who read out the second bi-monthly Monetary Policy statement for the current financial year, presented by the MPC, said that the reverse repo rate too was kept unchanged at 3.35 percent. The Marginal Standing Facility (MSF) rate and bank rate also remained unchanged at 4.25 percent. This is the sixth time in a row that the RBI has maintained a status quo on policy rate. The central bank had last revised its policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.

Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the RBI to maintain liquidity, in case of shortage of funds or due to some statutory measures. It is one of the main tools of RBI to keep inflation under control. While the reverse Repo rate is when the RBI borrows money from banks when there is excess liquidity in the market. The banks benefit from it by receiving interest for their holdings with the RBI. During high levels of inflation in the economy, the RBI increases the reverse repo rate.

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India’s central bank’s bi-monthly policy came even as the second wave of COVID-19 pandemic has started to slow down due to the fall in a daily number of cases. Friday’s policy statement came after RBI’s MPC started three-day deliberations on June 2.

In April, RBI had announced its first monetary policy of the ongoing financial year that commenced on April 1. Currently, the Repo Rate or the lending rate is at 4 percent, and the reverse repo rate or RBI’s borrowing rate is at 3.35 percent. These rates were kept unchanged during April’s monetary policy review statement. 

Key Takeaways

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The policy rate remained at 4%, which is the lowest level in over a decade. The forward guidance given by the RBI’s MPC, which was changed to “state-based” in April 2021 as against the “time-based”, has been retained at “state-based” guidance in the current policy amidst heightened uncertainty. RBI will ensure the availability of adequate funds to aid economic recovery.

Surplus liquidity conditions in the system to be maintained and sustained: Government Securities Acquisition Programme (GSAP) 2.0 of Rs 1.2 lakh crore has been announced for Q2-FY21. The last tranche of GSAP 1.0 will be worth Rs 40,000 crore of which Rs 10,000 crore would constitute the purchase of State Development Loans(SDLs). Special liquidity finance for Small Industries Development Bank of India (SIDBI) and on-tap Targeted Long Term Repo Operations (TLTRO) for the contact-intensive sectors has been announced for durable liquidity flow to these segments.

The inflation outlook in Q1-FY22 has been retained at the same level as the previous policy while there has been an upward revision since Q2-FY22. Upside risks to inflation include persistent supply-side disruptions of the second wave while downside risks include high base-effect and progress of the monsoon. The rising trajectory of the international crude prices and surge in international commodities and logistics prices could keep core inflation elevated.

GDP

RBI has projected India’s GDP growth at 9.5 percent (slashed by 1%) for the ongoing Financial Year (FY) of 2021-2022. There has been a downward revision in the GDP growth for Q1 and Q2 of FY22 while there has been an upward revision in Q3 and Q4. Positives include an upswing in exports (Mar-May 2021), adoption of pandemic working conditions by individuals and businesses, vaccination drives, and forecast of normal monsoon. Downside risks include the increased spread of the virus in rural areas.

Addressing the media, Das said that the resilience of the agriculture sector, forecast of monsoon, and the gathering momentum of the global economy could act as tailwinds for the domestic economy as the second wave recedes. Besides the RBI’s foreign exchange reserve is in touching distance of the $600 billion marks. This gives the RBI great confidence to deal with challenges arising out of global spillovers, he added.

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