RBI Monetary Policy Update – November 2021

The Monetary Policy Committee voted unanimously to keep Reserve Bank of India’s key lending rate – the repo – unchanged at 4% while voting 5 to 1 majority to continue with the ‘accommodative’ stance as long as necessary to revive growth till the impact of COVID-19 on the economy is mitigated.

POLICY :

  • 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 revive and sustain on a durable basis and continue to mitigate the impact of COVID-19 on the economy
  • Reverse repo rate stands at 3.35%; MSF and Bank rate at 4.25%
  • Private consumption still below its pre-pandemic levels; hence continued policy support is warranted for a durable and broad-based economy
  • Public finances have been strengthened by buoyant tax revenues
  • Economic activity is broadly evolving in line with MPC assessment in October policy
  • Aggregate demand is still lagging as it hinges on private investment
  • The MPC believe headwinds from global developments is the main risk to the domestic outlook, which is now somewhat clouded by the Omicron variant of COVID-19
  • The minutes of the MPC’s meeting will be published on Dec 22, 2021.
  • The next meeting of the MPC is scheduled during Feb 7 to 9, 2022

GROWTH:

  • All components of GDP registered growth with export, import strongly surpassing their pre-COVID levels
  • Consumption demand is improving; Rural demand remains resilient with farm employment picking up
  • Urban demand is also showing signs of strengthening
  • Tax cut on petrol and diesel should support consumption demand by increasing purchasing power
  • Government consumption is also picking up from August, providing support to aggregate demand
  • Government’s focus on capex should crowd in private investment, which has remained in a prolonged state of muted activity
  • Recovery interrupted by second wave of the pandemic is regaining traction.
  • Real GDP growth projection is retained at 9.5% in 2021-22 consisting of 6.6% in Q3 versus 6.8% from October policy; 6.0% in Q4 vs 6.1% in October policy.
  • Real GDP growth for Q1 FY23 projection remains unchanged at 17.2%, while for Q2 FY23, growths is seen at 7.8%

INFLATION:

  • Reduction in excise duty and VAT on petrol and diesel will bring about a durable reduction in inflation
  • The inflation trajectory is, therefore, likely to be in line with our earlier projections, and price pressures may persist in the immediate term
  • Vegetable prices are expected to see a seasonal correction with winter arrivals in view of bright prospects for the rabi crop
  • Supply side interventions by the Government have limited the fallout of continuing high international edible oil prices on domestic prices
  • Cost-push pressures continue to impinge on core inflation, though their pass-through may remain muted due to the slack in the economy
  • CPI inflation is projected is retained at 5.3% for FY22: 5.1% in Q3 and 5.7% in Q4 unchanged from August policy of 2021-22, with risks broadly balanced.
  • CPI inflation for Q1 FY23 is expected to ease to 5% versus 5.1% projected in August policy and stay at 5% in Q2 of FY23.

LIQUIDITY:

  • The Reserve Bank has maintained ample surplus liquidity in the banking system to nurture the nascent growth impulses and support a durable economic recovery
  • RBI will continue rebalancing liquidity surplus by shifting it out of the fixed rate overnight reverse repo window into the variable rate reverse repo (VRRR) auction of longer maturity
  • Objective is to re-establish the 14-day VRRR auction as the main liquidity management operation

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