RBI's Monetary Policy Statement

RBI came out with its monetary policy statement on February 5, 2021.The policy statement picks up from where the Union Budget 2021-22 left. It will bolster the government’s efforts to mitigate the Covid-19- induced slowdown and put the economy on a high growth trajectory, while keeping inflation and interest rates under control. Dr Manas R Das Close on the heels of the Union Budget 2021-22, RBI came out with its monetary policy statement on February 5, 2021. The budget aims at rejuvenating the weak aggregate demand in order to accomplish a growth rate of reasonably high order. This implies a lot of responsibility for RBI. As aggregate demand picks up owing to the budgetary measures, and given that the Indian economy is vulnerable to supply shocks from time to time, controlling inflation on the part of RBI will be a major responsibility. Being the public debt manager, RBI has to manage the massive market borrowing programme as envisaged in the budget –Rs.80,000 crore in the rest of this fiscal and an estimated Rs.12 lakh crore in 2021-22 - and money market rates. Moreover, credit being the fuel for growth RBI should ensure adequate credit flow to the productive sectors of the economy through the banking system. Against this backdrop, the Monetary Policy Committee (MPC) resolved to maintain status quo, i.e., keep the policy repo rate under the Liquidity Adjustment Facility (LAF) unchanged at four percent. Consequently, the Reverse Repo Rate under the LAF remained unchanged at 3.35%, and the Marginal Standing Facility (MSF) Rate and the Bank Rate at 4.25% each. In addition, the “accommodative” stance of the monetary policy was retained for at least the current financial year and into the next financial year so that growth revives on a “durable” basis and the economic impact of COVID-19 is ameliorated. At the same time, in future, inflation remains leashed within the target. The statement projects the retail inflation as follows: 5.2% for 2020-21 Q4, 5.2-5.0% for 2021-22 H1 and 4.3% for 2021-22 Q3, with risks broadly balanced. The statement projects the real GDP growth rate as follows: 10.5% for 2021-22 – 26.2-8.3% in H1 and six percent in Q3. In the ‘Developmental and Regulatory Policies’ section, RBI decides, inter alia, as follows: Ø  To gradually restore the Cash Reserve Ratio (CRR) in two phases in a non-disruptive manner. Banks would now be required to maintain CRR at 3.5% of Net Demand and Time Liabilities (NDTL) effective from the reporting fortnight beginning March 27, 2021 and four percent of NDTL effective from fortnight beginning May 22, 2021. Ø  In order to incentivize new credit flow to the Micro, Small and Medium Enterprise (MSME) borrowers, scheduled commercial banks will be allowed to deduct credit disbursed to ‘New MSME borrowers’ from their NDTL for calculation of CRR, subject to certain conditions. Ø  To set up an Expert Committee on urban cooperative banks involving all stakeholders in order to provide a medium-term road map to strengthen the sector, enable their faster rehabilitation/resolution and examine other critical aspects. Ø  To provide retail investors online access to the government securities market – both primary and secondary - along with the facility to open their gilt securities account with RBI. In a word, the RBI monetary policy statement picks up from where the Union Budget 2021-22 left. The policy statement will bolster the government’s efforts to mitigate the Covid-19- induced slowdown and put the economy on a high growth trajectory, while keeping inflation and interest rates under control.  About the Author: Dr. Manas R. Das is a former senior economist of State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medallist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of Indian Institute of Bankers. He has won several awards, besides being a prolific writer.