RBI Monetary Policy: Policy Rates, GDP Outlook, Liquidity Measures & More

RBI Monetary Policy: Policy Rates, GDP Outlook, Liquidity Measures & More

Last updated: 04 Jun, 2021 | 08:16 am

RBI Monetary Policy: Policy Rates, GDP Outlook, Liquidity Measures & More

Repo keeps rate unchanged, RBI maintains accommodative stance

  • The  RBI's Monetary Policy Committee (MPC) has kept the repo rate unchanged at 4% in its bi-monthly policy meeting held today (June 04th 2021). The reverse repo rate too stands unchanged at 3.35%. 
  • Repo rate is the rate at which the RBI lends to commercial banks, and reverse repo is the rate at which it borrows from them. 
  • The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy. The idea is to revive and sustain growth on a durable basis.
  • The repo rate has been cut by a total 115 basis points since March 2020 to cushion the shock from the pandemic.

Inflation outlook

  • RBI said that these decisions are in-line with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%; while supporting growth at the same time. 
  • CPI inflation has now remained within RBI’s upper tolerance band of 4-6% in the last five months. Retail inflation has eased to 4.29% in Apr-21, compared with 5.52% in Mar-21, mainly due to a drop in vegetable prices. 
  • Going forward, the inflation trajectory is likely to be shaped by global commodity prices, monsoon, and the progress in vaccination to control the rise of Covid infections. 
  • The rising trajectory of international crude prices together with logistics costs, pose upside risks to the inflation outlook, while a normal south-west monsoon and recent supply side interventions should lead to easing of pulses and cereals inflation.
  • Keeping these factors in mind, RBI expects CPI inflation to be 5.1% in FY22; 5.1% in Q1FY22, 5.4% in Q2, 4.7% in Q3 and 5.3% in Q4. All of this is within its tolerance band.

GDP growth outlook

  • India’s GDP grew by 1.6% in the Jan-Mar 21 period, before the second wave of the pandemic took effect. This comes on top of a 0.5% growth in the Oct-Dec 20 quarter
  • The RBI has now downgraded its growth outlook for FY22 to 9.5% compared to a previous forecast of 10.5% in response to the second wave of Covid-19 infections. 
  • On the positive side, Rural demand remains strong and the expected normal monsoon bodes well for GDP growth. However, the increased spread of COVID-19 infections in rural areas, however, poses downside risks.
  • Taking these factors into consideration, real GDP growth is now projected at 9.5% in FY22, consisting of 18.5% in Q1, 7.9% in Q2, 7.2% in Q3, and 6.6% in Q4.

Additional steps by RBI

  • To support the debt markets, RBI has approved a special liquidity facility of Rs 15,000 crore for contact intensive sectors. 
  • Banks who lend using this window can park an equivalent amount of liquidity at the RBI's reverse repo window at 40 basis points above the prevailing rate of 3.35%. This is being done to incentivize banks to lend more
  • The RBI has also extended its government bond purchase programme G-SAP (Government Securities Acquisition Programme) into the second quarter. The RBI will buy Rs 1.2 lakh crore in bonds in Q2 FY22, after buying Rs 1 lakh crore in Q1. This is being done with the aim of managing the yield curve. 
  • A special liquidity facility  will be opened for SIDBI as well for on-lending and refinancing.
  • Regional rural banks have now been permitted to issue certificates of deposit.

INDmoney Analysis

  • The RBI has raised concerns about the uncertainty posed due to the second wave of the virus. It has downgraded the GDP growth forecast in Q1 to 18.5% from 26.2% estimated earlier, due to potential additional lockdowns across the country. This could dent the pace of recovery.
  • The decision to maintain the repo and reverse repo rate by the RBI was in line with street expectations. CPI inflation within the RBI band for the last five months has lent comfort. However, there are risks of inflation rising upwards if the monsoon does not play out as expected and increasing global commodity prices.
  • Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the volatility.
  • Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up.