Recent news from the Reserve Bank of India (RBI) has caused quite a stir in the economic sector. The RBI’s forecast for real Gross Domestic Product (GDP), which experienced significant impact due to the Covid pandemic during the fiscal year 2020-2021, indicates an expected growth of 10.5% in the fiscal year 2021-2022. This prediction comes after the RBI enlisted several measures in its Monetary Policy Report to address the economic damage inflicted by the Covid-19 pandemic.
Key Points in the GDP Forecast
The projected 10.5% growth in real GDP by the RBI for the fiscal year 2021-22 is likely to fluctuate within the range of 26.2 to 8.3% in the first half and 6% in the third quarter of 2021. Notably, the GDP contracted by 23.9% in the June quarter of 2020-21 and fell by 7.5% in the September quarter of 2020-21, due to the lockdown and closures of industries triggered by the pandemic. Real GDP, essentially a measurement of economic output, takes into account the effects of inflation or deflation, unlike nominal GDP which doesn’t require adjustments for inflation since it’s calculated using current prices.
Rationale Behind the Positive Outlook
Several factors are contributing to this positive economic outlook. Rural demand is expected to remain strong thanks to favourable agriculture prospects. Urban demand and the demand for contact-intensive services should also strengthen with a significant reduction in Covid-19 cases and the continued vaccination efforts. Consumer confidence is on the rise, and business expectations in manufacturing, services, and infrastructure are positive. Additionally, the government’s fiscal stimulus under the AtmaNirbhar 2.0 and 3.0 schemes is anticipated to boost public investment.
Impacts of the Union Budget 2021-22
The Union Budget 2021-22 is also expected to play a vital role in accelerating the growth momentum, with its focus on sectors like health and well-being, infrastructure, innovation, and research.
Unchanged Policy Rates and Other Decisions by the RBI
The RBI has decided to maintain the repo rate under the Liquidity Adjustment Facility (LAF) at 4%. Additionally, the reverse repo rate under the LAF remains at 3.35%, with the Marginal Standing Facility (MSF) rate and the Bank Rate being fixed at 4.25%.
Restoration of Cash Reserve Ratio (CRR)
In other significant decisions, the RBI has decided to restore the CRR from 3% to 4% in two stages by May 2021, in a non-disruptive manner.
Direct Retail Investment in Government Securities (G-Sec)
The RBI has proposed allowing small investors direct access to the G-Sec platform, which are tradable instruments issued by the Central or State Governments and considered as the safest form of investment.
The Monetary Policy Committee’s Accommodative Stance
The Monetary Policy Committee (MPC) of the RBI has decided to continue its accommodative stance as long as necessary for reviving growth on a durable basis and mitigating the Covid-19 impact on the economy while ensuring that inflation remains within the target. These decisions align with the objective of achieving the medium-term target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2 % while supporting growth.
About the Monetary Policy Committee
The Monetary Policy Committee, a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, was established for maintaining price stability while keeping in mind the objective of growth. Its formation was recommended by an RBI-appointed committee led by then deputy governor Urjit Patel in 2014. The committee comprises six members (including the Chairman), three officials from the RBI, and three external members nominated by the Government of India. The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%).
Understanding Key Terms
The repo rate is the rate at which the central bank of a country lends money to commercial banks in case of fund shortfalls. On the other hand, the reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country. The RBI also uses the Liquidity Adjustment Facility (LAF) as a monetary policy tool, allowing banks to borrow money through repurchase agreements (repos). The bank rate is the rate charged by the RBI when lending funds to commercial banks, and the Marginal Standing Facility (MSF) is a scheme for banks to borrow overnight from the RBI during emergency situations. Finally, the Cash Reserve Ratio (CRR) stipulated by the RBI is the minimum ratio of total deposits that banks are required to hold as cash.
