Policy Rates Left Unchanged To Support A Hesitant Recovery: 10 Takeaways from the Monetary Policy Committee

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In its biannual meeting held in August, the RBI’s Monetary Policy Committee (MPC) decided to keep key policy rates unchanged to support India’s economic recovery. By keeping rates steady and taking an ‘accommodative stance’, the RBI hopes to facilitate durable growth. 

Here are 10 takeaways from the MPC meeting:


1. Status Quo On Key Policy Rates 

The repo rate has been left unchanged at 4%. The reverse repo rate and the marginal standing facility are also retained at 3.35% and 4.25% respectively. A stable repo rate means that banks will not have to increase interest rates on loans. 


2. Global Trade Momentum Loss

In the second quarter of 2021, global trade has decelerated overall with higher costs of shipping and logistics. Some countries that are vaccinating rapidly and supporting economic growth with policy measures seem to be rebounding from the pandemic. Other countries are seeing subdued growth as a consequence of new infections.


3. Rising Crude Oil Prices

Due to rising crude oil prices, headline inflation in both emerging and advanced economies is surging. In such conditions, central banks across the world are tightening their monetary policy. The MPC hopes that an increase in crude oil production by September 2022 will help keep inflation in check. 


4. Indian Economic Activity Boost

According to the MPC, domestic activity in India has picked up since pandemic restrictions eased in June-July. Sowing of kharif crops improved. Fertilizer and tractor sales also indicate a rise in rural demand. An increase in recreational spending is expected in urban areas as restrictions ease. 


5. High-Frequency Indicators Strengthened

High-frequency indicators across the board suggest that India is on the road to economic recovery, albeit slowly. Industrial production numbers jumped by two digits in May 2021 as compared to May 2020 but still remained lower than May 2019. Indicators like e-way bills, toll collections, electricity production, and air traffic were also strengthened in June and July. These indicators reflect that the economy is now recovering in line with COVID protocols.  


6. Inflation Rates High But Transitory

The consumer price index (CPI) rose by 6.3% in June. Food inflation also rose owing to the increase in prices of edible oils, pulses, eggs, milk and vegetables. Fuel inflation was in double digits in May and June this year, owing to rising prices of LPG, kerosene, firewood etc. Core inflation was at 6.1% in June, but is expected to go down in the coming months. 


7. Liquidity Uniform

Data released by the MPC indicates that there has been sufficient liquidity in the past few months. The daily absorption has risen consistently from Rs. 5 lakh crore in June to Rs. 6.8 lakh crores in July and Rs. 8.5 lakh crores in August (till 4th August 2021). In the second quarter of 2021-22, auctions for Rs. 40,000 crores helped level liquidity across illiquid segments. 


8. TLTRO Scheme Extended

On October 9th, 2020, the RBI had announced the TLTRO scheme for five stressed sectors that needed an increase in liquidity. The growth in the economy has been nascent and hesitant, so the RBI has decided to extend the scheme for three months up to December 2021. 


9. MSF Relaxation Extended

Under RBI’s marginal standard facility (MSF), banks were allowed from March 2020 onwards to borrow funds up to 3% of the net demand and time liability (NDTL). In order to help banks with liquidity crunches and allow them to meet their liquidity coverage ratio (LCR), the RBI has decided to extend that facility up to December 21st, 2021. 


10. The Way Forward

With the revival of the southwest monsoon, the sowing of kharif crops is expected to pick up. This will help ease cereal price pressures. Supply-side interventions from the government are also expected to help contain the prices of edible oils and pulses. Crude oil prices, however, are soaring internationally. In such a scenario, a reduction in indirect taxes on fuel by state and central governments can help relieve cost pressures. 


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