RBI's Bi-monthly Monetary Policy Review: RBI cuts FY22 GDP forecast to 9.5 percent, repo rate unchanged at 4 percent

RBI Governor Shaktikanta Das noted that the economy is likely to grow at the rate of 18.5 percent in the first quarter, 7.9 percent in the second quarter, 7.2 percent in the third quarter and 6.6 percent in the fourth quarter.

Created On: Jun 4, 2021 13:47 ISTModified On: Jun 4, 2021 13:52 IST
RBI Governor Shaktikanta Das

The Reserve Bank of India (RBI) on June 4, 2021 cut its real GDP growth forecast for the current financial year 2021-2022 to 9.5 percent. This was informed by RBI Governor Shaktikanta Das while making the Bi-Monthly Monetary Policy statement. 

The RBI Governor noted that the economy is likely to grow at the rate of 18.5 percent in the first quarter, 7.9 percent in the second quarter, 7.2 percent in the third quarter and 6.6 percent in the fourth quarter. The apex bank had earlier forecasted GDP growth to be 10.5 percent for FY22 with 26.2 percent growth predicted in 1Q, 8.3 percent in Q2, 5.4 percent in Q3 and 6.2 percent in Q4. 

The apex bank projected consumer price index (CPI) inflation at 5.1 percent for FY21-22. The RBI also decided to keep the repo rate (key lending rate) unchanged at 4 percent and the reverse repo rate (the borrowing rate) at 3.35 percent. 

The RBI Governor informed that adequate system level liquidity has been ensured and targeted liquidity to stressed entities have been provided. He further said that the impact on economic activity is expected to remain contained due to lower restrictions amid the second wave of the Covid-19 pandemic. 

RBI Bi-Monthly Monetary Policy Review: Key Highlights

• The RBI Monetary Policy Committee (MPC) had met on June 2nd, 3rd and 4th and took stock of the evolving macroeconomic and financial conditions and the impact of the second wave of the pandemic. 

• The MPC voted unanimously to maintain the status quo and keep the policy repo rate unchanged at 4 percent. 

• The MPC also decided to continue with its accommodative stance as long as necessary to revive and sustain growth on a durable basis and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. 

• The RBI has kept the marginal standing facility (MSF) rate and bank rate unchanged at 4.25 percent. The reverse repo rate is also unchanged at 3.35 percent.

Impact of Second Wave of COVID-19 pandemic

• The RBI Governor noted that since the MPC’s April meeting, the second wave of COVID-19 pandemic surged across several states and spread into smaller towns and villages, leaving a trail of human misery and tragedy in its wake. 

• Yet in these days of trials, the RBI Governor said that it is vital to remain focused on vanquishing the virus, as tough times call for tough choices and tough decisions. 

• As per provisional estimates of national income released by the National Statistical Office (NSO) on May 31, 2021, India’s real GDP contraction for 2020-21 stood at 7.3 per cent with 1.6 percent GDP growth in Q4.

• However, normal southwest monsoon this year along with comfortable buffer stocks is expected to help to keep cereal price pressures in check. 

• The MPC was of the view that at this juncture, policy support is required from all sides to regain the momentum of growth that was evident in the second half of FY 2020-21 and to nurture the recovery after it has taken root.

• Hence, the MPC decided to keep the policy rate at 4 percent and continue with its accommodative stance.

Assessment of Growth amid the second wave

• The second wave of COVID-19 led to unexpectedly higher rates of morbidity and mortality relative to the first wave. 

• The mutant strains made the virus highly transmissible across both urban and rural areas, which led to fresh restrictions on activities across the country.

• Yet unlike the first wave when the economy had come to an abrupt under the national lockdown, the impact on economic activity was relatively contained in the second wave due to restrictions on mobility being regionalised and nuanced. 

• Also, people and businesses were more adapting to pandemic working conditions this time. 

• The urban demand recorded sequential moderation during April-May 2021 and manufacturing and services activities weakened due to restrictions and local lockdowns imposed by the states. 

• The mobility indicators declined during April-May but remained above the levels seen during the first wave in 2020. 

• The domestic monetary and financial conditions were highly accommodative and supportive of economic activity. 

• The vaccination process is also expected to gather steam in the coming months and that should help to normalise economic activity.

Rebound in Global Trade 

• The RBI Monetary Policy Committee noted a rebound in global trade with the strengthening of external demand, which is expected to support India's export sector as well. 

• The RBI Governor noted that global demand conditions are expected to improve further supported by fiscal stimulus packages and the fast progress of vaccination in advanced economies. 

• India’s exports grew in March, April and May 2021.

• Conducive external conditions are also forming that will enable durable recovery beyond pre-pandemic levels. Hence, there is an increased need for enhanced and targeted policy support for exports. 

• Though there was a sequential decline of indicators of rural demand in April, the rural demand is expected to remain strong backed by the forecast of a normal monsoon. 

• However, there are risks due to the increased spread of COVID-19 infections in rural areas.

• Taking all these factors into consideration, RBI has projected real GDP growth to be 9.5 percent in 2021-22 including the growth of 18.5 percent in Q1, 7.9 percent in Q2, 7.2 percent in Q3 and 6.6 percent in Q4 of 2021-22.


• The favourable base effects that brought about the moderation in headline inflation by 1.2 percentage points in April, may continue through the first half of the year. This will be further conditioned by the progress of the monsoon and effective supply-side interventions by the Government. 

• The risks to inflation can come from the persistence of the second wave and consequent restrictions on activity across India. In such a scenario, there will be a need to actively monitor insulating prices of essential food items from supply-side disruptions.

• There will also be a need for coordinated, calibrated and timely measures by both Centre and states to prevent the emergence of supply chain bottlenecks and increase in retail margins.

• Taking these factors into condition, the CPI inflation has been projected to be 5.1 percent during 2021-22, which includes 5.2 percent in Q1, 5.4 percent in Q2, 4.7 percent in Q3 and 5.3 percent in Q4 of 2021-22 with risks broadly balanced. 

RBI announces Additional Measures

The RBI Governor announced certain additional measured based on their continuing assessment of the macroeconomic situation and financial market conditions. The additional measures are as follows.

1. On-tap Liquidity Window for Contact-intensive Sectors 

• A separate liquidity window of ₹15,000 crores is being opened till March 31, 2022 with a term of 3 years at the repo rate to mitigate the adverse impact of the second wave of the pandemic on certain contact-intensive sectors.

• Under this scheme, banks can provide fresh lending support to hotels/restaurants, tourism/travel agents, tour operators and adventure/heritage facilities, aviation ancillary services and other services including car repair services, spa clinics, private bus operators and beauty parlours/saloons.

• The banks will also be permitted to park their surplus liquidity up to the size of the loan book created under this scheme with the RBI under the reverse repo window at a rate that is 25 bps lower than the repo rate.

2. Special Liquidity Facility to SIDBI

• The RBI had extended fresh support of Rs 50,000 crore to All India Financial Institutions (AIFIs) on April 7, 2021 for new lending in 2021-22 to ensure the continued flow of credit to the real economy.

• This support included Rs 15,000 crore to the Small Industries Development Bank of India (SIDBI). 

• To further support the MSMEs, especially smaller MSMEs, it has been decided to extend a special liquidity facility of ₹16,000 crore to SIDBI for on-lending/ refinancing through novel models and structures. 

• The facility will be available at the prevailing policy repo rate for one year, which may be further extended depending on its usage.

3. Enhancement of the Exposure Thresholds under Resolution Framework 2.0

The RBI had announced Resolution Framework 2.0 on May 5, 2021 to provide resolution of COVID-19 related stress of MSMEs as well as non-MSME small businesses and loans to individuals for business purposes.

The RBI has decided to expand the framework to expand the coverage of borrowers under the scheme by enhancing the maximum aggregate exposure threshold from ₹25 crore to ₹50 crores for MSMEs and non-MSME small businesses and loans to individuals for business purposes.

4. Placement of Margins for Government Securities Transactions on behalf of FPIs

The RBI has decided to permit Authorized Dealer banks to place margins on behalf of their FPI clients for their transactions in Government securities (including State Development Loans and Treasury Bills), within the credit risk management framework of banks.

5. Facilitating Flexibility in Liquidity Management by Issuers of Certificates of Deposit

The RBI has decided to permit Regional Rural Banks (RRBs) to issue Certificates of Deposit (CDs). All issuers of CDs will be permitted to buy back their CDs before maturity, subject to certain conditions. This will facilitate greater flexibility in liquidity management.

6. Availability of National Automated Clearing House (NACH) on all days of the week

The NACH is a bulk payment system operated by the NPCI, which facilitates one-to-many credit transfers such as payment of dividend, interest, salary, pension and collection of payments.

The RBI has proposed to make NACH, which is currently available on bank working days, on all days of the week effective from August 1, 2021.

Source: RBI

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