Reserve Bank of India (RBI) released its bi-monthly monetary policy review as RBI Governor Shaktikanta Das made the announcements.
The key highlights are as below:
- RBI will buy Rs 40,000 crore of govt securities on June 17, out of which Rs. 10,000 crore will contribute to State Development Loans (SDLs). This is an attempt by the government to ensure ample liquidity in the markets and keep bond yields within a certain limit. The focus being an attempt to reduce the government’s cost of borrowing and enable government financing at lower rates.
- Rs 1.20 lakh crore G-Sec will be purchased in Q2.
- It was noted that India’s forex reserves may have exceeded USD 600 billion. High level of forex reserves provides support to the government of India and RBI in managing India’s financial issues during a time of major economic contraction (the COVID pandemic). Rising reserves also help in keeping INR stable against USD.
- RBI projects retail inflation at 5.1% in FY 2021-22. This is still higher than the target of 4% (within a band of +/- 2%) set by the government which rules out possibilities for further rate cuts.
- RBI maintains accommodative monetary policy stance:
- Reverse Repo Rate has been kept unchanged at 3.35%
- RBI Repo rate of lending rate has been kept unchanged at 4%
- India’s GDP Growth for FY 2021-2022 is now projected to be 9.5%, as compared to 10.5% projected in April. The reduction in forecast can be attributed to the 2nd wave of COVID.
- Expectations of a normal monsoon season. Due to this food grain production is expected to reach record levels which will help in economic recovery.
1) Global Economy Assessment:
- The global economy has seen significant recovery since the last monetary policy committee met in April 2021 primarily due to major advanced economies.
- Recovery has also been powered by large vaccination drives and stimulus packages being introduced.
2) Domestic Economy Assessment:
- The National Statistical Office reported India real Gross Domestic Product (GDP) contraction at 7.3% for FY 2020-21 as on 31 May 2021 with GDP growth of 1.6% in Q4 of FY 2020-21 on a year-on-year basis.
- Due to the rise of COVID cases in rural areas, two wheeler sales and tractor sales witnessed significant declines.
- GST collections were highest in April 2021.
3) Forward Outlook
- Excise duties, cess and taxes imposed by the Centre and States need to be adjusted in a coordinated manner to contain input cost pressures which are a rising concern due to petrol and diesel prices.
- A normal monsoon should along with good buffer stocks help keep cereal prices in check.
- Declining infections, restrictions and localised lockdowns across states could ease and reduce the supply chain disruptions thereby reducing cost pressures.
- CPI inflation projected quarter wise:
- Q1- 5.2%
- Q2- 5.4%
- Q3- 4.7%
- Q4- 5.3%
4) Growth Outlook
- Rural demand remains strong and an expected normal monsoon will aid its growth.
- Urban demand has been dented by the second wave. This has brought about a change in business models to be more ‘COVID compatible’ which should help economic recovery especially in manufacturing and service sectors which are not contact intensive.
- Strengthening global recovery should support the export sector.
- Domestic monetary and financial conditions remain highly accommodative and supportive of economic activity.
- The vaccination process is expected to gather momentum in the coming months and should help to normalise economic activity quickly.
- Real GDP growth projection quarter wise:
- Q1- 18.5%
- Q2- 7.9%
- Q3- 7.2%
- Q4- 6.6%