Explained: Behind RBI’s Decision To Keep Repo Rate Unchanged

Written by George Mathew, edited by Explained Desk

Bombay | Updated: Jun 4, 2021 10:27:55 PM

With the Covid pandemic impacting the near-term outlook for the economy, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on Friday maintained the key lending rate, or the catch rate, on Friday. pension, unchanged at 4% for the sixth time in a row and reduced the growth rate to 9.5% for fiscal year 2021-2022 after a three-day meeting.

What prompted the central bank to keep rates?

The RBI policy panel said the second wave of Covid-19 has changed the short-term outlook, requiring urgent policy interventions, active surveillance and other timely measures to prevent the emergence of bottlenecks in the world. the supply chain and the accumulation of retail margins. Political support from all quarters – fiscal, monetary and sectoral – is needed to foster the recovery and accelerate the return to normalcy.

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As a result, the MPC has decided to keep the current repo rate at 4% and maintain an accommodative position for as long as necessary to revive and support growth on a sustainable basis and continue to mitigate the impact of Covid- 19 on the economy, while ensuring that inflation remains within target going forward, the panel said. The central bank also kept the repo rate (the RBI’s borrowing rate from banks) under the liquidity adjustment facility (LAF) at 3.35% and the rate on the facility. permanent marginale (MSF) and the discount rate at 4.25%.

Why has the growth rate been reduced?

The central bank reduced gross domestic product (GDP) growth for fiscal 22 (2021-22) to 9.5% from the previous projection of 10.5%. Urban demand was shaken by Wave 2, but companies’ adoption of new Covid-compatible business models for a suitable work environment could cushion the blow to economic activity, especially in manufacturing sectors and services that do not require intensive contact. In contrast, the strengthening of the global recovery should support the export sector.

The panel said domestic monetary and financial conditions remain very accommodating and supportive of economic activity. In addition, the vaccination process should accelerate in the coming months and should allow economic activity to normalize quickly. Taking these factors into account, real GDP growth is now projected at 9.5% in 2021-2022, or 18.5% in the first quarter (Q1), 7.9% in Q2, 7.2% in Q3 and 6.6% in Q3. Q4: 2021-22

What is the RBI’s finding on the economy?

The central bank panel said that the forecast of a normal southwest monsoon, the resilience of agriculture and the agricultural economy, the adoption of Covid-compatible business models by businesses and the acceleration of the global recovery are forces that can provide favorable winds to revive domestic economic activity when the second wave subsides.

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On the other hand, the spread of Covid-19 infections in rural areas and the impact on urban demand present downside risks. Speeding up the vaccination campaign and closing gaps in health infrastructure and vital medical supplies can alleviate the ravages of the pandemic. Rural demand remains strong and the expected normal monsoon bodes well for maintaining its dynamism in the future.

What does the RBI say about inflation?

The panel projected retail price inflation at 5.1% – within the RBI’s inflation range of plus / minus four percent – during 2021-2022. In addition, it forecast 5.2% in the first quarter, 5.4% in the second quarter, 4.7% in the third quarter and 5.3% in the fourth quarter of 2021-2022 with broadly balanced risks.

According to the MPC, the future path of inflation is likely to be shaped by upward and downward uncertainties. The upward trajectory of international commodity prices, especially crude, as well as logistics costs pose upside risks to the inflation outlook. Excise duties, tariffs, and taxes imposed by the Center and the States must be adjusted in a coordinated fashion to contain the input cost pressures emanating from gasoline and diesel prices. A normal southwest monsoon and comfortable buffer stocks should help contain the pressure on grain prices.

In addition, recent interventions on the supply side are expected to ease tension in the pulse market. Further measures on the supply side are needed to alleviate pressures on legumes and edible oil prices. With infections declining, restrictions and blockages located in states could gradually ease and ease disruptions to supply chains, reducing cost pressures. Weak demand could 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. He decided to carry out another operation within the framework of G-SAP (public securities acquisition program) for the purchase of G-Sec of Rs 40,000 crore on June 17, 2021. Of this amount, Rs 10,000 crore would constitute the purchase of State Development Loans (SDLs). It was also decided to undertake another G-SAP in the second quarter of 2021-22 and to conduct secondary market buy 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 (until May 31) in addition to Rs 60 000 crore under the first G-SAP. An auction under Operation Twist was also conducted on May 6, 2021 to facilitate the smooth evolution of the yield curve.

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