RBI Monetary Policy Statement: RBI retains real GDP growth at 9.5 percent in 2021-22, repo rate unchanged at 4%

The real GDP growth projection has been retained at 9.5 percent in 2021-22, which includes 7.9 percent in Q2, 6.8 percent in Q3 and 6.1 percent in Q4 of 2021-22. The real GDP growth for Q1:2022-23 is projected at 17.2 percent.

Created On: Oct 8, 2021 13:05 IST
RBI Governor Shaktikanta Das
RBI Governor Shaktikanta Das

RBI Monetary Policy Statement: The RBI Monetary Policy Committee has decided to keep the policy repo rate unchanged at 4.0 percent and reverse repo rate unchanged at 3.35 percent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 percent. This was informed by RBI Governor Shaktikanta Das while reading out the Monetary Policy Statement, 2021-22 on October 8, 2021. 

This was the RBI Governor's twelfth statement since the onset of the pandemic. Over the period, the apex bank has taken more than 100 measures to proactively and decisively respond to the unprecedented crisis. 

The RBI Monetary Policy Committee had met on 6th, 7th and 8th October, 2021 and based on an assessment of the evolving macroeconomic and financial conditions and the outlook, the committee voted unanimously to maintain status quo with regard to the policy repo rate and also decided to continue its accommodative policy stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy. 

The RBI also plans to ensure that the inflation remains within the target going forward.

Indian Economy- Assessment 

The RBI Governor noted that the recovery of the Indian economy is gaining traction with COVID-19 vaccination giving greater confidence to open up and normalise economic activity. He said that India is in a much better place today than at the time of the last MPC meeting. 

-Growth impulses are strengthening and the inflation trajectory is turning out to be more favourable than anticipated. 

-CPI inflation turned out to be lower than anticipated during July-August.

-The actual outturn of real GDP growth in Q1:2021-22 at 20.1 percent was a little below the MPC’s forecast of 21.4 percent.

-However, the high-frequency indicators for Q2 of 2021-22 suggest that economic recovery has gained momentum, supported by:

•Robust Vaccination pace

•Fall in infection numbers

•Record Kharif foodgrains production

•Capital expenditure

•Better monetary and financial conditions

•Sufficient external demand

Economic Growth

Almost all components of GDP registered year-on-year growth, despite a sharp loss of momentum due to the second wave of the COVID-19 pandemic. The real GDP growth for Q1:2021-22 was 20.1 percent. The pent-up demand and the festival season is expected to give further fillip to urban demand in the second half of the financial year. 

The rural demand is also expected to get impetus from the continued resilience of the agricultural sector and record production of Kharif foodgrains in 2021-22. 
The pick up in import of capital goods and cement production also point towards some revival in investment activity. 

The capacity utilisation (CU) in the manufacturing sector, which declined sharply in Q1:2021-22, is assessed to have recovered in Q2 and further improvement is expected. 

Aggregate demand

While aggregate demand is improving but the output is still below the pre-pandemic level and the recovery remains uneven and dependent on policy support. The recovery in aggregate demand gathered pace in August-September with critical support from exports, as per RBI.

The services that are contact intensive, which contribute about 40 percent of economic activity in India, are still lagging. There has been a slight recovery with a gradual pickup in such services together with the strong performance of technology-driven sectors.

Hence, the MPC has decided to keep the repo rate at 4 percent and continue with its accommodative stance.

Real GDP projection

The real GDP growth projection has been retained at 9.5 percent in 2021-22, which includes 7.9 percent in Q2, 6.8 percent in Q3 and 6.1 percent in Q4 of 2021-22. The real GDP growth for Q1:2022-23 is projected at 17.2 percent.

Consumer price inflation 

CPI registered moderation during July-August, falling back into the tolerance band of 5.3 percent with the easing of food inflation.

The food price pressure is continued to remain in check with improvement in monsoon and expected higher Kharif production along with adequate buffer stock of food grains.

However, the core inflation (fuel inflation) remains a concern with elevated global crude oil and other commodity prices along with acute shortage of key industrial components and high logistics costs, which are adding to input cost pressures. 

The headline inflation continues to be significantly influenced by very high inflation in select items such as edible oils, petrol and diesel, LPG and medicines. 

The CPI inflation is projected at 5.3 percent for 2021-22, 5.1 percent in Q2, 4.5 percent in Q3 and 5.8 percent in Q4 of 2021-22. The CPI inflation for Q1:2022-23 is projected at 5.2 percent. 

Liquidity and Financial Market Conditions

The RBI has maintained ample surplus liquidity to support a speedy and durable economic recovery since the onset of the pandemic. The system liquidity remained in large surplus during August-September, with daily absorptions rising from an average of Rs 7.7 lakh crore in July-August to Rs 9.0 lakh crore during September.

The surplus liquidity rose even further to a daily average of Rs 9.5 lakh crore in October so far (up to October 6). The potential liquidity overhang amounts to more than ₹13.0 lakh crore.

Additional measures announced by RBI

1. Introduction of On Tap Special Long-Term Repo Operations (SLTRO) for Small Finance Banks (SFBs) 

The three-year-long SLTRO of Rs 10,000 crore at the repo rate has been introduced for Small Finance Banks (SFBs) in May 2021. The facility will be available till October 31, 2021. 

The facility has been extended till December 31, 2021 recognising the need for continued support to small business units, micro and small industries and other unorganised sector entities.

2. Introduction of Retail Digital Payment Solutions in Offline Mode

The scheme was announced in August 2020 to test technologies that enable digital payments even in remote places where internet connectivity is either absent or barely available. 

With the encouraging experience gained from the pilot tests, it is proposed to introduce a framework for retail digital payments in offline mode across the country. This is expected to further expand the reach of digital payments across India. 

3. Enhancing Transaction Limit in IMPS to ₹5 lakh

The RBI has proposed to increase the per-transaction limit of Immediate Payment Service from Rs 2 lakh to Rs 5 lakh.

4. Geo-Tagging of Payment System Touch Points

The system has been proposed to be introduced to leverage geo-tagging technology for capturing exact location information on all existing and new PA infrastructure namely  Point of Sale (PoS) terminals, Quick Response (QR) Codes. This will complement the Payment Infrastructure Development Fund (PIDF) framework of the Reserve Bank in ensuring wider geographical deployment of PA infrastructure.

5. Regulatory Sandbox

RBI's Regulatory Sandbox (RS) has so far introduced three cohorts on ‘Retail Payments’; ‘Cross Border Payments’; and ‘MSME Lending’. To provide further impetus to the fintech eco-system, a fourth cohort on ‘Prevention and Mitigation of financial frauds’ is being announced. 

6. Review of Ways and Means Advances (WMA) Limits & Relaxation in Overdraft (OD) Facility 

RBI has decided to continue with the interim enhanced WMA limits of ₹51,560 crore for States/UTs for a further period of six months up to March 31, 2022. It has also been decided to continue the enhancement of a maximum number of days of overdraft (OD) in a quarter from 36 to 50 days and the number of consecutive days of OD from 14 to 21 days, up to March 31, 2022.

7. Internal Ombudsman for NBFCs

RBI has decided to introduce the Internal Ombudsman Scheme (IOS) for certain categories of NBFCs having higher customer interface to strengthen the internal grievance redress mechanism of NBFCs.

The next meeting of the Monetary Policy Committee is scheduled from December 6 to 8, 2021.

Source: RBI

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