RBI's Monetary Policy Review: Repo rate unchanged at 4%, real GDP growth projected at 10.5 per cent in 2021-22

The MPC voted unanimously to keep the policy repo rate unchanged and decided to continue its accommodative stance as long as necessary, at least in the current financial year and into the next year to revive growth on a durable basis.

Created On: Feb 5, 2021 12:12 ISTModified On: Feb 5, 2021 12:12 IST
RBI Governor

The Reserve Bank of India's Monetary Policy Committee voted unanimously to keep the policy repo rate unchanged at 4 percent. This was informed by RBI Governor Shaktikanta Das during a press briefing on February 5, 2021. 

The RBI Governor informed that the Monetary Policy Committee had met on February 3rd, 4th and 5th and deliberated on current and evolving macroeconomic financial developments, both domestic and global. 

The MPC voted unanimously to keep the policy repo rate unchanged and decided to continue its accommodative stance as long as necessary, at least in the current financial year and into the next year to revive growth on a durable basis and mitigate the impact of COVID-19 while ensuring that inflation remains within target while going forward.

The marginal standing facility rate and the bank rate also remain unchanged at 4.25 percent, the reverse repo rate remains unchanged at 3.35 percent. 

RBI Bi-Monthly Monetary Policy 2021: Key Highlights

Inflation outturns in the last two months have turned out to be better than expected, as for the first time during the COVID-19 period, inflation eased below the upper tolerance level of 6 percent. 

The factors that could shape the food inflation trajectory in coming months like the bumper Kharif harvest arrivals in markets, rising prospects of a good rabi crop, larger winter supplies of key vegetables and softer poultry demand on fears of avian flu indicate a stable near-term outlook.

The new year 2021 has begun on a strong positive note with vaccination drives in major economies as well as in India

The real GDP growth has been projected at 10.5 percent in 2021-22 – in the range of 26.2 to 8.3 percent in H1 and 6.0 percent in Q3.

Signs of Recovery?

The RBI Governor noted that the signs of recovery have strengthened further since the last meeting of the MPC:

-Improvement in capacity utilisation in the manufacturing sector to 63.3 percent in Q2:2020-21 from 47.3 percent in previous quarter. 

- Consumer confidence is reviving and business expectations of manufacturing, services and infrastructure remain upbeat. 

-There has been growth at robust pace in the movement of goods and people and domestic trading activity.

- Electricity and energy demand reflect a broader normalisation of economic activity than in December, even as fears of second wave abate. 

- There is renewed confidence in the real estate sector, as per data for sales and new launches of residential units in major metropolitan centres.

- Manufacturing, services and composite purchasing managers’ indices (PMI) are in expansion zones with manufacturing PMI rising to 57.7 in January 2021 from 56.4 in December 2020 and the services PMI rising to 52.8 in January 2021 from 52.3 in December 2020.

-The COVID-19 vaccination drive is expected to provide an impetus for the restoration of contact intensive sectors.

-Foreign Direct Investment and Foreign Portfolio Investment to India have risen in recent months, reposing faith in the impressive recovery in the Indian economy. 

-The speed of daily national highway construction is also rising and the pace of award of national highway projects in 2020-21 has doubled year-on-year.

-The flow of financial resources to the commercial sector has been improving, particularly in respect of non-food bank credit and via commercial paper (CPs), credit by housing finance companies, private placement of corporate bonds and foreign direct investment. The total flow of these resources is ₹8.85 lakh crore this year so far (up to January 15, 2021), compared with ₹7.97 lakh crore during the corresponding period of last year. 

-The latest bank lending survey of the RBI suggests a further sequential improvement in sentiment on loan demand across all sectors right up to Q2:2021-22.

-The projection for CPI inflation has been revised to 5.2 per cent for Q4 of FY 2020-21, 5.2 per cent to 5.0 per cent in H1 of FY 2021-22 and 4.3 percent for Q3 of FY 2021-22, with risks broadly balanced. 

-The Government would be reviewing the inflation target for the next five years by March 2021.

Union Budget 2021

The RBI Governor stated that the Union Budget 2021-22 has provided a strong impetus for the revival of sectors such as health and well-being, infrastructure, innovation and research,
among others. 

He stated that this will have a cascading multiplier effect going forward, especially in improving the investment climate and reinvigorating domestic demand, income and  employment. 

He further stated that the investment-oriented stimulus under AatmaNirbhar 2.0 and 3.0 (given during the peak of the pandemic) has started working its way through and is improving the spending momentum along with the quality of public investment. 

The RBI Governor noted that both will facilitate regaining India’s growth potential over the medium-term. 

While concluding, the RBI Governor said that it is their strong conviction, backed by forecasts, that in 2021-22, we would undo the damage that COVID-19 has inflicted on the economy and that going forward, we see the Indian economy moving in only one direction and that is upward.

Background

This is the first Monetary Policy review by  RBI Governor  Shaktikanta Das after the presentation of Union Budget 2021-22.

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