RBI KEEPS REPO RATE UNCHANGED

RBI KEEPS REPO RATE UNCHANGED

Subject : Economics

Context : Recently, the Monetary Policy Committee (MPC) of the RBI has kept the repo rate, unchanged at 4 per cent for the sixth time in a row and slashed the growth rate to 9.5 per cent for fiscal 2021-22.

Concept :

• The panel said that the second wave of Covid-19 has altered the near-term outlook.
• It necessitated urgent policy interventions, active monitoring and further timely measures to prevent emergence of supply chain bottlenecks and build-up of retail margins.
• The policy support from all sides i.e. fiscal, monetary and sectoral, was required to nurture recovery and expedite return to normalcy.
• The MPC decided to retain the prevailing repo rate and continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy.

Reasons for slashing growth rate

• The central bank has scaled down the FY22 (2021-22) gross domestic product (GDP) growth to 9.5 per cent as against the previous projection of 10.5 per cent.
• The urban demand has been dented by the second wave, but adoption of new Covid-compatible occupational models by businesses for an appropriate working environment may cushion the hit to economic activity.
• The panel said domestic monetary and financial conditions remain highly accommodative and supportive of economic activity.
• The vaccination process is expected to gather steam in the coming months and should help to normalise economic activity quickly.

RBI’s plans on the liquidity front

• It will continue to conduct regular operations for liquidity management.
• It has decided to conduct another operation under G-SAP (government securities acquisition programme) for purchase of G-Secs of Rs 40,000 crore.
• It has also been decided to undertake another G-SAP in Q2 of 2021-22 and conduct secondary market purchase operations of Rs 1.20 lakh crore to support the market.
• It has undertaken regular open market operations and injected additional liquidity to the tune of Rs 36,545 crore in addition to Rs 60,000 crore under the first G-SAP.