The RBI’s policy panel stated that the second wave of Covid-19 has changed the near-term scenario, needing immediate policy interventions, diligent monitoring, and further timely steps to avoid supply chain bottlenecks and the accumulation of retail margins. To foster recovery and speed the return to normalcy, policy support from all sides – fiscal, monetary, and sectoral – was essential. As a result, the MPC decided to keep the current repo rate at 4% and maintain the accommodative stance for as long as it is necessary to revive and sustain growth on a long-term basis, as well as continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward, according to the panel.
According to the RBI’s panel, Forecasts of a regular south-west monsoon, the resilience of agriculture and the farm sector, and company adoption of Covid-19 compatible operating models are among the drivers that could give tailwinds to the recovery of domestic economic activity.
After a three-day meeting, the Reserve Bank of India’s Monetary Policy Committee (MPC) kept the key lending rate, or repo rate, unchanged at 4% for the sixth time in a row, and slashed the growth rate to 9.5 percent for fiscal 2021-22, citing the impact of the Covid-19 pandemic on the economy’s near-term outlook.
Compared with its forecast of 10.5%, the central bank has lowered FY22 (2021-22) gross domestic product (GDP) to 9.5%. The second wave has harmed urban demand, but enterprises that implement new Covid-compatible occupational models for an optimal working environment may be able to mitigate the impact on economic activity, particularly in manufacturing and service industries that are not contact demanding. The export sector, on the other hand, should benefit from the increasing global recovery.
Domestic monetary and financial conditions, according to the panel, are still very accommodating and supportive to economic growth. Furthermore, the immunisation process is projected to pick up steam in the next months, assisting in the rapid normalisation of economic activity. Taking these factors into account, real GDP growth in 2021-22 is now expected to be 9.5 percent, with 18.5 percent in the first quarter (Q1), 7.9 percent in the second quarter (Q2), 7.2 percent in the third quarter (Q3), and 6.6 percent in the fourth quarter (Q4):2021-22.
RBI’s say on the economy –
The development of Covid-19 infections in rural areas and the resulting decrease in urban demand are potential drawbacks. The pandemic’s destruction can be mitigated by increasing vaccination campaigns and bridging gaps in healthcare infrastructure and essential medical supplies. The rural demand is still robust, and the projected normal monsoon will help to keep it that way in the future.
RBI’s say over inflation –
During 2021-22, the panel expects retail inflation to be 5.1 percent, which is within the RBI’s four-percentage-point inflation zone. Furthermore, with risks well balanced, it forecasts 5.2 percent in Q1, 5.4 percent in Q2, 4.7 percent in Q3, and 5.3 percent in Q4 of 2021-22.
According to the MPC, uncertainties on the upside and downside are expected to impact the inflation trajectory in the future. The upward trend in international commodity prices, particularly crude, as well as logistics costs, pose upside risks to inflation expectations. Excise duties, cess, and taxes imposed by the Centre and States must be coordinated to keep input cost pressures from rising gasoline and diesel prices at bay. A regular south-west monsoon, along with enough buffer inventories, should keep cereal price pressures under control.
Recent supply-side interventions, on the other hand, are projected to alleviate the tightness in the pulses market. More supply-side actions are required to alleviate pricing pressures on pulses and edible oils. As illnesses decline, restrictions and localised lockdowns across states may lessen gradually, decreasing supply chain disruptions and economic constraints. Weak demand conditions may further dampen core inflation pass-through, according to the MPC.
What is RBI going to do about the liquidity in economy –
The RBI stated that it will continue to perform regular liquidity management operations. It has agreed to execute another G-SAP (government securities acquisition programme) operation on June 17, 2021, for the purchase of Rs 40,000 crore of G-Secs. The purchase of state development loans would account for Rs 10,000 crore (SDLs).
To boost the market, it has also been agreed to execute another G-SAP in Q2 of 2021-22 and conduct secondary market buying operations of Rs 1.20 lakh crore.
The Reserve Bank has conducted regular open market operations and injected additional liquidity worth Rs 36,545 crore (up to May 31) this year, in addition to Rs 60,000 crore under the first G-SAP. On May 6, 2021, a purchase and sell auction was held under Operation Twist to aid in the smooth progression of the yield curve.