RBI monetary policy , Why have rates bee

Q. What is this in news? 

• With retail inflation remaining elevated, the Monetary Policy Committee (MPC) of the Reserve Bank of India, has decided to keep the policy rates unchanged for the third time in a row in the bi-monthly monetary policy announced on Friday 
• This effectively means lending rates in the banking system and EMIs on home, auto and personal loans will remain more or less steady.

Q. What are the current policy rates?

• The six-member MPC voted unanimously to leave the policy repo rate — the rate at which the RBI lends funds to banks — unchanged at 4 per cent.
• It also decided to continue with the accommodative stance of monetary policy as long as necessary — at least through 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 the target going forward.
• The Marginal Standing Facility (MSF) rate and the Bank rate remain unchanged at 4.25 per cent. The reverse repo rate — the rate at which the RBI gets funds from banks — stands unchanged at 3.35 per cent.

Q. Why has the policy panel opted for status quo on rates?

• The MPC is of the view that inflation is likely to remain elevated, barring transient relief in the winter months from prices of perishables. This constrains monetary policy at the current juncture from using the space available to act in support of growth.
• “At the same time, the signs of recovery are far from being broad-based and are dependent on sustained policy support,” the RBI says.
• “A small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes. Further efforts are necessary to mitigate supply-side driven inflation pressures,” MPC said.
• Monetary policy will monitor closely all threats to price stability to anchor broader macroeconomic and financial stability. Accordingly, the MPC in its meeting today decided to maintain the status quo on the policy rate, the central bank said.

Q. And what is the outlook on the inflation front?

• The RBI has projected CPI inflation at 6.8 per cent for the third quarter of 2020-21, 5.8 per cent for Q4 of 2020-21 and 5.2 per cent to 4.6 per cent in the first half of 2021-22, with risks broadly balanced.
• The policy panel said the outlook for inflation has turned adverse relative to expectations in the last two months. The substantial wedge between wholesale and retail inflation points to the supply-side bottlenecks and large margins being charged to the consumer.
• While cereal prices may continue to soften with the bumper kharif harvest arrivals and vegetable prices may ease with the winter crop, other food prices are likely to persist at elevated levels, the RBI said.
• Further, crude oil prices have picked up on optimism of demand recovery and continuation of OPEC-plus production cuts, and are expected to remain volatile in the near-term. Cost-push pressures continue to impinge on core inflation, which has remained sticky and could firm up as economic activity normalises and demand picks up.

Q. So, is the recovery picking up momentum?

• The panel said the recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum as unlocking spurs activity and employment, especially of labour displaced by Covid-19.
• These positive impulses are, however, clouded by a possible rise in infections in some parts of the country, prompting some local containment measures.
• As a whole, consumers remain optimistic about the outlook, and business sentiment of manufacturing firms is gradually improving, it said. Fiscal stimulus is increasingly moving beyond being supportive of consumption and liquidity to supporting growth-generating investment. But on the other hand, private investment is still slack and capacity utilisation has not fully recovered.
• While exports are on an uneven recovery, the prospects have brightened with the progress on the vaccines. Demand for contact-intensive services is likely to remain subdued for some time due to social distancing norms and risk aversion, it said.

Q. What’s the GDP growth being projected by the MPC?

• The GDP contracted by 23.9 per cent in the June quarter and 7.3 per cent in the September quarter.
  With the country gradually opening up after the lockdown, real GDP is expected to contract by 7.5 per cent in 2020-21, and expand by 0.1 per cent in Q3 of 2020-21 and 0.7 per cent in Q4 of 2020-21.
• GDP is expected to expand by 21.9 per cent to 6.5 per cent in the first half of 2021-22, with risks broadly balanced, the RBI panel said.

Q. What is the RBI’s action plan going forward?

• The central bank said it will continue to respond to global spill overs in order to secure domestic stability with liquidity management operations.
• The policy panel decided to maintain status quo on the policy rate and continue with the accommodative stance as long as necessary — at least during the current financial year and into the next financial year — to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.