The RBI’s Monetary Policy Committee (MPC) conducted its 1^st bi-monthly monetary policy meeting for FY2021-22 from April 5-7, 2021.

On the basis of an assessment of the evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to:

• Keep the policy repo rate unchanged at 4.0%;
• Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand unchanged at 4.25%
• The reverse repo rate under the LAF stands unchanged at 3.35%.
• The MPC also decided to continue with the Accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.

Part A: RBI’ s Policy decision Rationale:

1. Inflation

Headline inflation increased to 5.0% in February after having eased to 4.1% in January 2021.

The MPC expects CPI outlook to be subjected to both upside and downside pressures such as:

• The bumper food grains production in 2020-21 is expected to sustain softening of cereal prices.
• Reduction of import duties and appropriate incentives to enhance productivity domestically could work towards a better demand-supply balance over the medium-term.
• On the other hand, impact of high international commodity prices and increased logistics costs are being felt across manufacturing and services.

Based on the above factors, the MPC has provided the following outlook for CPI Inflation, with risks broadly balanced:

Above values are Projections

2. Growth

The MPC expects real GDP to be based on the following factors:

• Rural demand remains buoyant and record agriculture production for 2020-21 is expected to further support its resilience.
• Urban demand has been gaining strength on the back of normalisation of economic activity and is expected to get a fillip with the ongoing vaccination drive.

Based on the above factors, the MPC has provided the following outlook for Real GDP growth:

3. Liquidity

• System liquidity remained in large surplus in February and March 2021 with average daily net liquidity absorption of Rs 5.9 lakh crore.
• Corporate bond issuances at Rs 6.8 lakh crore during 2020-21 (up to February 2021) were higher than Rs 6.1 lakh crore during the same period last year.
• India’s forex reserves increased by $99.2 billion during 2020-21 to $577.0 billion at end-March 2021, providing an import cover of 18.4 months and 102% of India’s external debt.

RBI Governor announced additional liquidity measures in line with its accommodative policy stance. These liquidity measures are explained in Part B.

Part B: Key Statements on Developmental and Regulatory Policies:

1. LTRO on Tap Scheme – Extension of Deadline

RBI has extended the TLTRO on Tap Scheme, which was previously available up to March 31, 2021, by a period of six months, i.e., till September 30, 2021.

2. Liquidity Facility for All India Financial Institutions

In consonance with the policy objective of nurturing the still nascent growth impulses, it has been decided to extend fresh support of Rs 50,000 crore to the All India Financial Institutions (AIFIs) – the National Bank for Agriculture and Rural Development (NABARD); the Small Industries Development Bank of India (SIDBI); the National Housing Bank (NHB); and the EXIM Bank for new lending in 2021-22. Accordingly, NABARD will be provided a special liquidity facility (SLF) of Rs 25,000 crore for a period of one year to support agriculture and allied activities.

3. Asset Reconstruction Companies – Constitution of a Committee

BI has proposed to constitute a Committee to undertake a comprehensive review of the working of ARCs in the financial sector ecosystem and recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector.

4. Permitting banks to on-lend through NBFCs

With a view to ensure continued availability of credit to Agriculture/MSME/Housing sectors to aid faster economic recovery, it has been decided to extend the Priority Sector Lending (PSL) classification for lending by banks to NBFCs for ‘on-lending’ to the above sectors for six months, i.e. up to September 30, 2021.

The next meeting of the MPC is scheduled during June 02 – June 04.

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