The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) recently decided to keep the repo rate constant in a bid to prioritize the economy’s recovery over inflation amid the Covid-19 pandemic. The committee has also laid out several liquidity management measures and plans to improve the oversight of the financial system.
The MPC, which comes under the RBI Act 1934, is tasked with maintaining price stability while considering growth objectives. It determines the policy interest rate, or the repo rate, necessary to meet the inflation target, currently set at 4%.
Interest Rates Remain Unchanged
The MPC maintained the repo rate at 4% and the reverse repo rate at 3.35%. The repo rate is the interest at which RBI loans money to banks, while the reverse repo rate is how much commercial banks earn for parking their money with the central bank. Despite persistent high retail inflation, this is the third consecutive time that key policy rates have remained untouched.
Since late March, the repo rate has been reduced by 115 basis points to protect the economy from the repercussions of Covid-19 and the resultant lockdowns. Typically, a lower repo rate results in cheaper loans for the public.
GDP Projections Amidst the Pandemic
The real Gross Domestic Product (GDP) for FY 2020-21 is projected at -7.5%. Real GDP is an inflation-adjusted measure demonstrating the value of all goods and services produced by an economy in one year. However, with gradual reopening after the lockdown and increased Q2 activities, GDP is expected to grow by 0.1% in the December quarter and 0.7% in the March quarter. However, GDP growth contracted by 23.9% in the Q1 of 2020 compared to the same period (April-June) in 2019.
Inflation and Policy Implications
Inflation remains a concern for policymakers. Supply-side bottlenecks have fueled inflation and consumers face high margins. Cost-push pressure or cost-push inflation continue to affect core inflation, which may increase as economic activity normalizes and demand picks up. RBI estimated retail inflation at an average of 6.8% in Q3, dropping to 5.8% in Q4 and between 5.2% and 4.6% in the first half of the fiscal year 2021-22.
The current level of inflation has restricted the monetary policy from supporting growth. The signs of recovery are not broad-based and rely on sustained policy support. The Consumer Price Inflation (CPI) reached a six-year high of 7.6% in October, well above its medium target level of 4%.
Continued Accommodative Stance
The MPC chose to maintain an accommodative stance as long as necessary, at least during the current financial year and into the next, to promote lasting growth and minimize the impact of Covid-19 on the economy.
Introduction of Risk-based Internal Audit Norms
As a part of measures intended to improve governance and assurance functions at supervised entities, RBI introduced risk-based internal audit norms for large Urban Cooperative Banks (UCBs) and Non-Banking Financial Companies (NBFCs). RBI aims to harmonize the guidelines on the appointment of statutory auditors for commercial banks, UCBs, and NBFCs to enhance the quality of financial reporting.
Digital Payment Security Controls Directions
The RBI plans to issue Digital Payment Security Controls directions for the regulated entities to ensure robust security and user convenience in the digital payment channels ecosystem. These directions will set requirements for solid governance, implementation, and monitoring of certain minimum standards on common security controls for channels like internet banking, mobile banking, and card payments.
Targeted Long-Term Repo Operations
The RBI has chosen to include the 26 stressed sectors identified by the Kamath Committee within the sectors eligible under on tap Targeted Long-Term Repo Operations (TLTRO), aiming to provide more liquidity to the economy impacted by the slowdown. The RBI had announced the TLTRO on Tap scheme in October 2020, which will be available up to 31st March 2021. Under TLTRO, banks can invest in specific sectors through instruments like corporate bonds, commercial papers, and non-convertible debentures (NCDs) to stimulate credit flow in the economy.
