Aug'21 -RBI Policy Highlights -

Writer # Indiabonds | August 9, 2021

The RBI’s Monetary Policy Committee (MPC) conducted its 3rd bi-monthly monetary policy meeting for FY21-22 from 4-6, August 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%.
GDP growth for FY22 retained at 9.5%.
Inflation projections for FY22 increased from 5.1% to 5.7%.
Accommodative stance to continue; policy geared towards rejuvenating growth.

Part A: RBI’ s Policy decision Rationale:

1. Inflation

Headline inflation surprised on the upside in May’21 at 6.30%, reflecting a combination of adverse supply shocks, elevated logistics costs, high global commodity prices and domestic fuel taxes. In Jun’21, headline inflation remained above the upper tolerance level at 6.26%, but price momentum moderated. Also, core inflation softened from its peak in May’21 of 6.6%. International crude oil prices remained volatile; any moderation in prices as a consequence of the OPEC plus agreement could contribute towards alleviating inflation pressures.

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

Recent inflation spikes are expected to be transitionary in nature.
Any moderation of price as a consequence of OPEC+ agreement could contribute towards alleviating price pressures.
Arrival of monsoon after a brief hiatus and gain of momentum in kharif sowing to help cool food inflation.
Rising Covid-19 cases in parts of the country may lead to supply side bottlenecks.

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

CPI Inflation Outlook	Q2FY22	Q3FY22	Q4FY22	Q1FY23	FY22
3^rd bi-monthly policy FY22	5.90%	5.30%	5.80%	5.10%	5.70%
2^nd bi-monthly policy FY22	5.40%	4.70%	5.30%	–	5.10%

Above values are Projections

2. Growth

The MPC expects growth outlook to be driven by the following factors:

Easing of restrictions amid increasing coverage of vaccinations.
Rural demand and agriculture to continue to remain strong.
Urban demand likely to accelerate with recovery in manufacturing and non-contact intensive services, release of pent-up demand and the pace of vaccination.
External demand remained buoyant during Q1FY22 and was reflected in increasing exports, lending critical support to aggregate demand.
Global commodity prices and episodes of financial market volatility, together with vulnerability to new waves of infections are, however, downside risks to economic activity.

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

GDP Growth Outlook	Q1FY22	Q2FY22	Q3FY22	Q4FY22	Q4FY22	FY22
3rd bi-monthly policy FY22	21.40%	7.30%	6.30%	6.10%	17.20%	9.50%
2^nd bi-monthly policy FY22	18.50%	7.90%	7.20%	6.60%	–	9.50%

Above values are Projections

3. Liquidity

Ample liquidity due to Reserve Bank’s purchase of government securities in the secondary market and capital flows, total absorption through reverse repos surged from a daily average of Rs 5.7 lakh crore in Jun’21 to Rs 6.8 lakh crore in Jul’21 and further to Rs 8.5 lakh crore in Aug’21 so far.
Reserve Bank will purchase securities under G-SAP worth Rs 25,000 cr each on 12th Aug’21 and 26th Aug’21.
The reduction in repo rate by 250 basis points since Feb’19 has resulted in a cumulative decline by 217 basis points in the weighted average lending rate (WALR) on fresh rupee loans.

4. Global Economy

Global economic recovery which had gained growth momentum has started to moderate due to resurgence in pandemic, driven by new variants. Most advanced economies with high vaccination density and policy stimulus showed strong growth rebound, whereas other economies remained subdued in terms of growth due to ongoing risk of new infections. Recent OPEC+ decision to increase supply will provide some relief to inflation concerns. Yields in most advance economies softened. Emerging market economies, on the other hand, remained elevated on country-specific factors. In the foreign exchange market, EME currencies depreciated in the wake of portfolio outflows since mid-June as risk appetite ebbed, while the US dollar has strengthened.