MPC’s Monetary Policy By RBI Governor

For the 7th Time in a Row, the Reserve Bank of India keeps rates unchanged!

The Monetary Policy Committee was formed in 2016 and has six members, three from the Reserve Bank of India and three from the government, headed by the RBI governor. The Monetary Policy by the Reserve Bank of India focuses broadly on four main aspects. The first aspect relates to the deliberations of the monetary policy of the committee and its decisions. The second part focuses on the assessment of growth and inflation. The third part focuses on financial market and liquidity conditions, and the fourth focuses on announcements of measurements from the Reserve bank of India.

Reserve bank of India releases the Monetary Policy Committee (MPC) reports every two months. The primary mandate is to keep the inflation rate between 2% to 6%. Experts believe that it should not be too low nor too high. 4 % is an ideal rate to consider. When it is deflected, it creates an alarming situation in an economy and increases unemployment. For the year 20-21, the first Reserve Bank of India’s Monetary Policy’s growth and inflation was released in April. RBI Bi-monthly policy repo rate is maintained at 4%. The reverse repo rate remains unchanged at 3.35%. Marginal Standing Facility (MSF), Bank Rate is also unchanged at 4.25%.

The Monetary Policy Committee met on 4th,5th & 6th August 2021 for assessment of the evolving domestic, global, and macro-economic and financial conditions. The MPC voted unanimously to keep the repo rate unchanged at 4% The MPC also decided on a 5 to 1 majority to continue with an accommodative stance, if necessary, to sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while keeping the inflation rate within the target. The margin standing facility rate and the bank rate remain unchanged at 4.25% and the reverse repo rate remains unchanged at 3.35%. Compared to June reports MPC is in better condition. The conduct of the monetary policy during the pandemic has geared to maintain congenial financial conditions to nurture and rejuvenate growth. At this stage, therefore, continued policy support from all sides, fiscal, monetary, and sectoral, is required to nurture recovery. MPC continues to be conscious of its mandate of anchoring inflation expectation as soon as the prospect of its sustainable growth is assured. Accordingly, MPC decided to retain the prevailing repo rate at 4% and continued its cumulative stance. The RBI approach reminds me of a quote ― Martin Luther King, Jr- “But I know, somehow, that only when it is dark enough can you see the stars”.

Inflation measured by consumer price index increased to 5.7% for the year 2022 versus 5.1% last year. In the last two months, CPI has witnessed a high rate. The reason behind this has primarily been the reduced supply side due to the second wave of Covid-19, along with an increase in logistic cost. High taxes on crude oil, petrol, diesel, and petroleum goods added to this unusual situation. In June, the headline inflation rate remained above the intolerant level, but the rate of increase in prices slowed down. This inflation situation has not arisen due to an increase in demand but due to existing demand and a decrease in supply. Therefore, there is a need to push the supply. In order to push supply, liquidity has to be infused so that the manufacturers can borrow loans at low lending rates from the bank and boost up their production to meet the demand.

 It is to be noted that economic activity has broadly evolved on the MPC expectations in June and the economy is recovering from the setback of the second wave. The economic domestic activity has started to normalize after the second wave of virus and phased reopening of the economy. High-frequency indicators suggest that consumption: both private and government, investment & external demand are all on the path of regaining momentum. The monsoon has revived after a brief hiatus and Kharif sowing is now gaining momentum. Some high-frequency indicators are also looking up again during the months of June and July. The RBI expectation is that activity is lightly scaling up with the vaccinations, continued large policy support, better adaptations to covid related protocols, and benign financial & monetary conditions.

As the second wave of the pandemic containment eases and the economy slowly rebuilds back, vaccine manufacturing and administration are steadily improving. Yet the need of the hour is not to drop our guard and remain vigilant against any possibility of a third wave especially in the background of increasing infection in various parts of the country. The RBI action together with the government aims at elevating distress and prioritizing growth while keeping the financial system healthy and stable. 

Thus, in a bird’s eye view, although the outlook for aggregate demand is improving, underlying conditions are still weak. Aggregate supply is also lagging below the pre-pandemic level. While several steps have been taken to ease supply constraints, more needs to be done to balance supply-demand in several sectors of the economy. The recent inflationary trends are evoking concerns, but the current assessment is that this pressure is transitory and largely driven by supply-side factors. In this upcoming month maybe by September, the Indian economy will come out of this economic crunch due to pandemic, provided the third wave is not witnessed. Inflation in the upcoming quarter will be hopefully high to a tolerant limit for which RBI will not have to take any corrective measures. 

We are during an extraordinary situation, arising from the pandemic, but we will pull on. Here I again take the liberty of quoting my favorite leader and social activist, Martin Luther King, “Keep moving, let nothing slow you up, move on”.

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