RBI’s First Bi Monthly Monetary Policy of 2021-22

Monetary-Policy-Committee

The Reserve Bank of India keeps policy rates unaltered and projects a GDP growth of 10.5%. Every two months, the Reserve Bank of India presents the Monetary Policy Committee’s Report. This financial year’s first Monetary Policy Committee Report was published on 7th April 2021.

The repo rate and reverse repo rate are unchanged for this quarter. 

The Monetary Policy Committee (MPC) fixes the benchmark of interest rate in India. The MPC was established in 2016. Its main mandate is to keep inflation between 2 to 6%. A lower inflation rate is scarier for the economy. It can lead to unemployment.

The meetings of the Monetary Policy Committee are held every 4 months in a year and it publishes its report after the meeting. The Monetary Policy Committee comprises 6 members: 3 from the RBI and 3 others are nominated by the government. It is headed by the RBI governor.

Initially, the decisions were only taken by the RBI but due to some discrepancies between the RBI and the Government, the Government also demanded a say and got the right to elect 3 members.

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The Government usually wants to keep the repo rate low. So, a committee was formed to attend to the decisions of both teams. The current 6 members of the MPC:

1. Shaktikanta Das (RBI Governor)

2. Michael Patra (RBI Deputy Governor)

3. Mridul Saggar (RBI)

4. Ashima Goyal (External)

5. Jayanth Verma (External)

6. Shashanka Bhide (External)

According to the recent Bimonthly policy report, the repo rate is maintained at 4%. It was the same previously. Repo rate is the interest rate charged by the RBI when it lends money to commercial banks.

The reverse repo rate is maintained at 3.35%. The reverse repo rate is the rate at which RBI borrows funds from the Indian commercial banks.

The Marginal Standing Policy (MSF) and Bank rate is maintained at 4.25%. MSF is the rate at which RBI lends funds overnight to scheduled banks, against government securities.

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The reverse repo rate is always less than the repo rate whereas MSF is always more than the repo rate.

The rates are considered after a vote by the members but this time it was unanimously voted by all the members to keep the rates steady. The reason behind maintaining a steady repo rate was to keep control of the increasing inflation. The RBI can not keep the repo rate too low so as to keep a leash on the inflation rate. Due to the inflation, the repo rate could not be brought any lower this time.

Till our economy does not recover, this monetary policy should remain accommodative, as was said by the RBI Governor.

The RBI retains the GDP growth forecast at 10.5% but the International Monetary Fund upped India’s GDP growth forecast to 12.5%. The difference occurred due to uncertainty caused by the COVID-19 Pandemic.

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The inflation rate for the first and second quarters for the financial year 2021-22 is expected to be 5.2%. For the third quarter, it is expected to lower a little to 4.4%. For the fourth quarter, it is expected to increase to 5.1%.

The inflation is going to be around 5%. It had to be maintained between 2 and 6%, averaging out to 4% but it is going to be more. Negative interest rates can become a drawback here and the citizens might plan to alter their investment plans.

Measures to be taken by RBI 

● The RBI will ensure orderly conduction of Government borrowing programs.

● According to this, the RBI plans to sell Government Securities (G-Sec) acquisitions worth Rs. 1 lakh crore to a secondary market for the April to June quarter. It is a long process and not possible for the general public to directly buy G-secs as compared to the usual buying of the shares of a company. G-secs are often bought by financial institutions and banks. By announcing to sell G-secs to a secondary market, it will be easily available for the general public.

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The Monetary Policy Committee

These measures were announced because of the tightening in the G-Sec market with an increasing debt requirement of central and state governments. Amidst the government plans to help build an Asset Reconstruction Company (ARC) called Bad bank which is being set up by banks, the RBI has decided to shape a committee to review the working of ARCs to ensure how better these elements can uphold the monetary area. If Non Profitable Assets (NPAs) on loans have increased, i.e, bad loans that fail to give any returns, these loans are sold to Bad banks. So, a committee has been set up to review their work.

Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) facilities will now be extended to non-bank payment institutions also. RTGS and NEFT provide the facility to transfer money from one account to another. If the transaction is more than 2 lakhs then RTGS comes into the picture and NEFT is used for less than 2 lakhs. Previously, these facilities were only provided by commercial banks but now non-bank payment institutions will also provide this amenity. It will be a boost to these institutions.

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The RBI also hiked the maximum end-of-day balance for payment banks to Rs. 2 lakhs from Rs. 1 lakh.

The RBI Governor said, “Prospects for the financial year 2021-22 have strengthened with the progress of the COVID-19 Vaccination program. However, the recent surge in infections has imparted greater uncertainty to the outlook and needs to be closely watched.

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