RBI's Bi-monthly Monetary Policy Review: RBI retains real GDP growth at 9.5% for FY 21-22, repo rate unchanged at 4%

The CPI inflation is projected at 5.7 % during 2021-22, which comprises 5.9% in Q2, 5.3% in Q3 and 5.8% in Q4 of 2021-22 with risks broadly balanced. 

Created On: Aug 6, 2021 12:46 IST
RBI Governor Shaktikanta Das
RBI Governor Shaktikanta Das

The Reserve Bank of India (RBI) on August 6, 2021 retained the real GDP growth forecast at 9.5 percent for the current financial year 2021-2022. 

The RBI has also kept the repo rate unchanged at 4 percent and reverse repo rate at 3.35 percent and decided to continue to maintain its accommodative stance. 

This was informed by RBI Governor Shaktikanta Das while making the Bi-Monthly Monetary Policy statement. The RBI Governor also informed that the CPI inflation is projected at 5.7 % during 2021-22, which comprises 5.9% in Q2, 5.3% in Q3 and 5.8% in Q4 of 2021-22 with risks broadly balanced. 

The CPI inflation for the first quarter of 2022-23 was projected at 5.1 percent. Speaking on the economy, the RBI Governor stated that the economic activity has broadly evolved along the lines of the Monetary Policy Committee's expectations in June and the economy is recovering from the setback of the second wave of COVID-19. 

RBI Bi-Monthly Monetary Policy Review: Key Highlights

•The RBI Monetary Policy Committee (MPC) met on 4th, 5th and 6th August 2021 and voted unanimously to keep the policy repo rate unchanged at 4 percent.

•The RBIU based its decisions on the assessment of the evolving domestic and global macroeconomic and financial conditions and outlook.

•The MPC has also decided with a 5 to 1 majority to continue its 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.

•The marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25 percent.

•The reverse repo rate has also been kept unchanged at 3.35 percent.

•The RBI Governor noted that India is at a much better position than at the time of the MPC’s meeting in June 2021, due to ease in containment measures and slow build back. 

•Yet, he cautioned that the need of the hour is not to drop our guard and to remain vigilant against any possibility of a third wave, especially in the background of rising infections in certain parts of the country.

•The current RBI decisions are aimed at alleviating distress and prioritising growth, while keeping the financial system healthy and stable. 

Domestic Growth

•Domestic economic activity has begun normalising with the easing of the second wave of the virus and the phased reopening of the economy. 

•Further easing of restrictions and increasing coverage of vaccinations are likely to boost private spending on goods and services including travel, tourism and recreational activities, propelling a broad-based recovery in aggregate demand. 

•The robust outlook for agriculture and rural demand would continue to support private consumption. 

•Urban demand is likely to accelerate with recovery in manufacturing and non-contact intensive services.

Inflation

•The CPI inflation rose sharply to 6.3 percent in May and remained at 6.3 percent in June.

•However, the core inflation registered an appreciable moderation, noted RBI. 

•The revival of the southwest monsoon and kharif sowing, buffered by adequate food stocks is expected to help in containing cereal price pressures in the months ahead. 

•High-frequency food price indicators show some moderation in prices of edible oils and pulses in July. 

•The inflation in core services like house rentals remains below historical averages, reflecting subdued demand conditions. 

•The crude oil prices are expected to be volatile with implications for imported cost pressures on inflation. 

•Inflation may remain close to the upper tolerance band up to Q2:2021-22, but the pressures may ease in Q3:2021-22 on account of Kharif harvest arrivals. 

•The CPI inflation is now projected at 5.7 percent during 2021-22, which includes 5.9 percent in Q2, 5.3 percent in Q3 and 5.8 percent in Q4 of 2021-22. The CPI inflation for Q1 of FY 2022-23 is projected at 5.1 percent.

Financial Market 

•The Reserve Bank of India (RBI) will conduct the open market purchase of government securities of Rs 25,000 crore on August 12 and August 26 under the G-sec Acquisition Programme (G-SAP 2.0). 

•The result of the auctions will be announced the same day. The RBI Governor said that it will continue to undertake these auctions and other operations like open market operations (OMOs) and operation twist (OT), among others and calibrate them in line with the evolving macroeconomic and financial conditions. 

Additional Measures

•The RBI has announced over 100 measures to mitigate the impact of the COVID-19 pandemic. 

•The apex will continue the monitoring of measures that are still in operation to ensure that the benefit of all our measures percolate down to targeted stakeholders. 

•The RBI, based on its continuing assessment of the macroeconomic situation and financial market conditions has announced the following additional measures:

1. On-tap TLTRO Scheme

The scope of the on-tap TLTRO scheme, which was initially announced on October 9, 2020 for five sectors, has been extended to stressed sectors identified by the Kamath Committee in December 2020 and bank lending to NBFCs in February 2021.

The operating period of the scheme has also been extended in phases till September 30, 2021 and on-tap TLTRO scheme further by a period of three months, till December 31, 2021.

2. Marginal Standing Facility (MSF)

The banks have been allowed to avail funds under the marginal standing facility (MSF) by dipping into the Statutory Liquidity Ratio (SLR) up to an additional one percent of net demand and time liabilities (NDTL).

To provide comfort to banks on their liquidity requirements, including meeting their Liquidity Coverage Ratio (LCR) requirement, this relaxation which is currently available till September 30, 2021 is being extended for three months, up to December 31, 2021. 

Conclusion

RBI Governor Shaktikanta Das stated that there is optimism that with adequate pandemic protocols and ramp-up in the vaccination rate, we should be able to tide over a third wave, if it occurs. 

He however noted that as a nation, we should continue to be vigilant to proactively deal with any resurgence of the pandemic with more rapidly transmissible mutants of the virus, should it happen.

The recovery so far remains uneven across sectors and needs to be supported by all policymakers. 

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