The Reserve Bank of India (RBI) recently published its Monetary Policy Report (MPR) for October 2021. This report detailed the current state of India’s financial climate, including unchanged policy rates, revised inflation projections, and the discontinuation of the Government Bond Acquisition Programme (GSAP).
Unchanged Policy Rates
In its continuing effort to support a durable recovery, the RBI has left policy rates untouched for the eighth consecutive time. These rates include the Repo Rate at 4%, Reverse Repo Rate at 3.35%, Marginal Standing Facility (MSF) at 4.25%, and the Bank Rate at 4.25%.
GDP Projection
RBI’s report indicates that the forecast for Real Gross Domestic Product (GDP) growth for the fiscal year 2021-22 stands steady at 9.5%.
Inflation Projections
The Consumer Price Index (CPI) inflation projection has been revised down to 5.3% from the previous estimate of 5.7% made in August 2021.
Government Bond Acquisition Programme (GSAP)
The GSAP, part of RBI’s Open Market Operations which involves specific purchases of government securities, has been discontinued. This termination is due to an excess liquidity overhang, increased liquidity resulting from government spending, and no additional borrowing required for Goods and Services Tax compensation. RBI has however stated that it will continue to conduct other liquidity management operations.
Continuation of Accommodative Stance
To revive and sustain growth and mitigate the impact of Covid-19 on the economy, the RBI has chosen to maintain an accommodative stance. This approach signifies a readiness to cut rates and inject money into the financial system as necessary.
Enhancement of Variable Reverse Rate Repo (VRRR)
The auction size of VRRR, used to absorb additional liquidity from the system, was increased to Rs 6 trillion by early December 2021. The RBI has also hinted at raising the VRRR duration to 28 days if required.
Key Terms Explained
The report contains definitions for understanding the financial climate, such as:
– Repo and Reverse Repo Rate: When there is a shortfall of funds, the central bank lends money to commercial banks at a set ‘repo rate.’ Conversely, the ‘reverse repo rate’ refers to the rate at which the RBI borrows money from commercial banks within India.
– Bank Rate: This is the rate charged by the RBI for lending funds to commercial banks.
– Marginal Standing Facility (MSF): A window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity is completely dried up.
– Open Market Operations: Market operations conducted by the RBI, involving the sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
– Government Security: Tradable instruments issued by the Central or State Governments that acknowledge their debt obligations.
– Consumer Price Index: An index measuring price changes from the retail buyer’s perspective.
About Monetary Policy Report
The MPR is a statutory and institutionalized framework under the RBI Act, 1934, for maintaining price stability, while keeping in mind the objective of growth. The policy determines the interest rate (repo rate) required to achieve the inflation target of 4%, with a leeway of 2% points on either side. The Governor of RBI is the MPR’s ex-officio Chairman.
