On Wednesday, April 7, the RBI announced the new monetary policy which keeps the repo rate and reverse repo rate unchanged at 4% and 3.5% respectively. The Monetary Policy Committee which decides the inner workings of the accommodative stance of the RBI kept the repo rate and reverse repo rate unchanged for the 5th time in a row.
RBI Governor Mr. Shaktikanta Das in a virtual press briefing said that the monetary policy committee were united in voting for the current accommodative stance of the RBI to continue sustaining growth. The current repo rate and reverse repo rate were unchanged also to alleviate the effect of the ongoing COVID-19 pandemic. Moreover, Mr. Das also said that the domestic economy’s primary focus for the time to come should be curbing the COVID-19 spread for economic resurrection.
Mr. Das also warned against multiple localized or nation-wide lockdown as they could hinder the economic growth. “The recent surge in infections has, however, imparted greater uncertainty to the outlook and needs to be closely watched especially as localised lockdowns could dampen the improvements in the demand conditions and delay the return of normalcy,” Mr. Das said. The committee also highlighted that the current surge in the COVID-19 cases is worrying but hoped that the inoculation drive could help with the containment of spread.
The Monetary Policy Committee observed that although the economic activities are slowly normalizing, the COVID-19 induced consumer skepticism has increased. “Consumer confidence has dipped with the recent surge in COVID infections in some states imparting uncertainty to the outlook. Taking these factors into consideration, the projection of real GDP growth for 2021-22 is retained at 10.5 per cent consisting of 26.2 per cent in Q1, 8.3 per cent in Q2, 5.4 per cent in Q3 and 6.2 per cent in Q4.”
Before we take a look at everything else that came from the Monetary Policy Committee, let’s first understand what repo rate and reverse repo rate is.
What is repo rate and reverse repo rate?
Repo rate is the rate at which banks like SBI, ICICI and more borrow money from the Central Bank of our nation, RBI, by selling their securities. In case there’s a shortage of funds observed by a bank, the bank can borrow money from RBI and maintain its liquidity. One of the indirect consequences of having a toll like repo rate in place is that it keeps the inflation under control.
On the other hand, the reverse repo rate, as the name suggests, is the rate at which the Central Bank, I.e., RBI borrows money from the commercial banks to curb the excess liquidity in market. The commercial banks receive an interest on the money it lends to the RBI. When the inflation skyrockets, RBI increases the reverse repo which motivates the commercial banks to give more funds to the RBI and earn returns.
Now that we know what reverse repo rate and repo rate means, let’s turn our focus towards what the monetary policy committee had to say today.
The MPC also spoke about the growth forecast of the GDP (gross domestic product) for the year 2021-22. The GDP projection for financial year 2021-22 is 10.5%. The first quarter is forecasted to have a GDP growth of 26.2%, the second quarter will be 8.3%, the third quarter will grow at 5.4% and the fourth quarter will see growth at 6.2%.
The RBI Governor also said that the monetary policy committee made changes to the consumer price index to 5% and said that the CPI inflation is forecasted to be at 5.2% for the first two quarters of the FY22, 4.4% for the third quarter and 5.1% for the fourth quarter.