This Study is written by Ayush Chandra
Table of Contents
RBI Monetary Policy Statement: The RBI Monetary Policy Committee has determined to hold the policy repo rate stable at 4.0 per cent and reverse repo rate fixed at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent. This was notified by RBI Governor Shaktikanta Das while explaining the Monetary Policy Statement, 2021-22 on October 8, 2021.
This was the RBI Governor’s twelfth statement since the origin of the pandemic. Over the period, the top bank has accepted more than 100 measures to proactively and decisively counter to the unique predicament.
The RBI Monetary Policy Committee had attended on 6th, 7th and 8th October 2021 and based on an estimate of the evolving macroeconomic and financial circumstances and the opportunity, the committee voted consistently to support the status quo with respect to the policy repo rate and also determined to maintain its accommodative policy stance as long as needed to revive and sustain growth on a permanent basis and proceed to lessen the influence of COVID-19 on the economy.
The RBI also plans to guarantee that inflation continues within the target going ahead.
Indian Economy- Assessment
The RBI Governor wrote that the improvement of the Indian economy is obtaining adhesion with COVID-19 vaccination providing more elevated courage to open up and normalise economic movement. He stated that India is in a much more reliable place today than at the time of the last MPC conference.
-Growth pressures are rising and the inflation trajectory is setting out to be more positive than expected.
-CPI inflation rolled out to be more moderate than expected during July-August.
-The actual outturn of real GDP growth in Q1:2021-22 at 20.1 per cent was a little below the MPC’s forecast of 21.4 per cent.
-Nevertheless, the high-frequency indicators for Q2 of 2021-22 recommend that economic recovery has got momentum, supported by:
•Robust Vaccination pace
•Fall in infection numbers
•Record Kharif foodgrains production
•Better monetary and financial conditions
•Sufficient external demand
Nearly all parts of GDP recorded year-on-year growth, notwithstanding a sharp loss of momentum due to the second wave of the COVID-19 pandemic. The real GDP growth for Q1:2021-22 was 20.1 per cent. The pent-up demand and the festival season is supposed to give more fillip to the urban market in the second half of the financial year.
The rural demand is also supposed to get a reason from the continued flexibility of the agricultural sector and record production of Kharif foodgrains in 2021-22.
The pick up in import of capital goods and cement product also point towards some improvement in investment activity.
The capacity utilisation (CU) in the industrial sector, which decreased clearly in Q1:2021-22, is estimated to have increased in Q2 and additional improvement is anticipated.
While aggregate demand is growing but the output is still below the pre-pandemic level and the improvement remains irregular and weak on policy support. The recovery in aggregate demand associated pace in August-September with significant support from exports, as per RBI.
The services that are meeting intensive, which contribute about 40 per cent of economic activity in India, are still lingering. There has been a sparse reconstruction with a gradual pickup in such services together with the powerful production of technology-driven sectors.
Hence, the MPC has chosen to keep the repo rate at 4 per cent and proceed with its accommodative stance.
Real GDP projection
The real GDP growth prediction has been held at 9.5 per cent in 2021-22, which includes 7.9 per cent in Q2, 6.8 per cent in Q3 and 6.1 per cent in Q4 of 2021-22. The real GDP growth for Q1:2022-23 is projected at 17.2 per cent.
Consumer price inflation
CPI registered balance during July-August, coming back into the threshold zone of 5.3 per cent with the easing of food inflation. The food price pressure is maintained to stop in check with change in monsoon and anticipated higher Kharif production along with adequate buffer stock of food grains.
However, the core inflation (fuel inflation) continues a matter with raised global crude oil and other commodity prices along with acute shortage of key industrial components and high logistics costs, which are continuing to input cost pressures.
The headline inflation remains to be significantly affected by very high inflation in select items such as edible oils, petrol and diesel, LPG and medicines.
The CPI inflation is projected at 5.3 per cent for 2021-22, 5.1 per cent in Q2, 4.5 per cent in Q3 and 5.8 per cent in Q4 of 2021-22. The CPI inflation for Q1:2022-23 is projected at 5.2 per cent.
Liquidity and Financial Market Conditions
The RBI has directed large surplus liquidity to promote a speedy and strong economic recovery since the start of the pandemic. The system liquidity continued in great surplus during August-September, with daily reflections rising from an average of Rs 7.7 lakh crore in July-August to Rs 9.0 lakh crore during September.
The surplus liquidity increased even more to a regular average of Rs 9.5 lakh crore in October so far (up to October 6). The potential liquidity projection amounts to more than ₹13.0 lakh crore.