RBI's August 2021 Monetary Policy
POLICY ACTION:
• MPC vote unanimously to keep repo rate unchanged at 4%
• MPC voted 5 to 1 majority to continue with accommodative stance as long as necessary to mitigate the impact of COVID-19 on the economy
• Reverse repo rate stands at 3.35%; MSF and Bank rate at 4.25%
• India is in a much better position than at the time of MPC’s June meeting
• We should not drop our guard and should remain vigilant against possibility of a third wave
• Economic activities have broadly evolved on the lines of MPC’s views
• monsoon has revived after a brief hiatus and kharif sowing is gaining momentum
• Our expectation is that activity is likely to gather pace with progressive up-scaling of vaccinations, continued large policy support, buoyant exports, better adaptations to COVID-related protocols, and benign monetary and financial conditions.
• The minutes of the MPC’s meeting will be published on Aug 20, 2021.
• The next meeting of the MPC is scheduled during Oct 6 to 8, 2021
GROWTH:
• Aggregate demand is improving, but underlying conditions are still weak
• Aggregate supply is also lagging below pre-pandemic levels
• More needs to be done to restore supply-demand balance in a number of sectors of the economy
• High frequency indicators suggests consumption, investment, external demand are all regaining traction
• Though investment demand is still anaemic, govt economic package will kick-start a long-awaited revival.
• Real GDP growth projection is retained at 9.5% in 2021-22 consisting of 21.4% in Q1 vs 18.5% in June policy; 7.3% in Q2 vs 7.9% in June; 6.3% in Q3 vs 7.2% in June; and 6.1% in Q4 versus 6.6% in projected in June policy.
• Real GDP growth for Q1 FY23 is projected at 17.2%
INFLATION:
• Recent inflationary pressures are evoking concerns
• June CPI was above the upper tolerance level, but price momentum moderated
• In June, Core inflation softened from its peak in May
• The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy.
• CPI inflation is projected at 5.7% in FY22 versus 5.1% projected in June policy: 5.9% for Q2 vs 5.4% in June policy; 5.3% in Q3 vs 4.7% in June; and 5.8% in Q4 vs 5.3% in June policy of 2021-22, with risks broadly balanced.
• CPI inflation for Q1 FY23 is projected at 5.1%
LIQUIDITY:
• Financial stability remains a top priority for the RBI
• The RBI via market operations, both conventional and unconventional, has maintained ample surplus liquidity to ensure easing of financial conditions in support of domestic demand
• Given the sustained inflows, the RBI has absorbed a daily average of Rs 5.7 lakh cr in June, Rs 6.8 lakh cr in July and Rs 8.5 lakh cr in August
• RBI conduct variable rate reverse repo auction of Rs 2.5 lakh cr on Aug 13, Rs 3 lakh cr on Aug 27; Rs 3.5 lakh cr on Sep 9 and Rs 4 lakh cr on Sep 24
• These enhanced VRRR auctions should not be misread as a reversal of the accommodative policy stance, as the amount absorbed under the fixed rate reverse repo is expected to remain more than Rs 4.0 lakh crore at end-September 2021\par To conduct two more auctions of Rs 25,000 cr each on Aug 12 and Aug 26 under G-SAP 2.0
• Will continue to conduct other operations like OMO, operation twist among other and calibrate them in line with evolving macroeconomic and financial condition.
ADDITIONAL MEASURES:
• RBI further extends the operating period of on-tap liquidity window scheme by a period of three months, ie, till Dec 31. Under the scheme, RBI allowed on-tap finance of Rs 15,000 cr for certain contact-intensive sectors. Banks may provide lending support with tenor up to three years at the repo rate.
• MSF extension till 31 Dec; increased access upto Rs 1.26 lakh crore
• Transition from Libor: Guideline amendment export credit in foreign currency may be made in any other prevalent currency rate
• Deferral of deadline to meet operational parameters for resolution plans -total debt to EBITDA ratio, current ratio, debt service coverage ratio, average debt service coverage ratio to Oct 1, 2022