RBI's August '21 Monetary Policy Report released

A comprehensive update on the monetary policy report for August 2021

RBI's August '21 Monetary Policy Report released

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• The story: The Reserve Bank of India (RBI) has released the Monetary Policy Report (MPR) for the month of August 2021. Though the decisions are announced earlier, the formal report arrives later.
• Details: The RBI kept the policy rate unchanged for the seventh time in a row. That is a clear sign of its accommodative stance. It appealed to the centre and states to reduce taxes on fuels to curb inflationary pressures, something that is bothering it now.
• What is the Monetary Policy Report: The "MPR" is published by the Monetary Policy Committee (MPC) of RBI, and is a statutory and institutionalized framework under the RBI Act, 1934, for maintaining price stability, while keeping in mind the objective of growth. The MPC determines the policy interest rate (repo rate) required to achieve the inflation target of 4% with a leeway of 2% points on either side. The Governor of RBI is ex-officio Chairman of the MPC which has six members in all.
• Latest policy stance:

1. Unchanged Policy Rates - Repo Rate - 4%, Reverse Repo Rate - 3.35%, Marginal Standing Facility (MSF) - 4.25%, Bank Rate- 4.25%
2. GDP Projection - Real Gross Domestic Product (GDP) growth for 2021-22 has been retained at 9.5%
3. Inflation - The RBI revised the projection for Consumer Price Index (CPI) inflation to 5.7% from 5.1%
4. Variable Rate Reverse Repos - To absorb additional liquidity in the system, the RBI announced conducting a Variable Rate Reverse Repo (VRRR) program due to the higher yield prospects as compared to the fixed rate overnight reverse repo. The RBI has decided to increase the quantum under the VRRR to Rs 4 trillion in a phased manner. It also extended the liquidity support to banks to lend to stressed businesses by another three months to 31th December 2021.

• Interest rates: Higher inflation level and delayed recovery in the economy has prompted the panel to keep rates steady. Interest rates in the banking system are expected to remain stable in the next couple of months. Recovery faced rough weather due to the Covid second wave and lockdowns in states
• What does "Accommodative Stance" mean: The RBI decided to continue with an 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, while ensuring that inflation remains within the target going forward. An accommodative stance means a central bank will cut rates to inject money into the financial system whenever needed.
• Suggestions made: With crude oil prices at elevated levels, a calibrated reduction of the indirect tax component of pump prices by the centre and states can help to substantially lessen cost pressures. On the economic front, despite the uptick, it is important that a stimulus is provided by the government to give a thrust to consumption. The timing of such measures will be apt at this juncture as the festive season is about to begin. The nascent and hesitant recovery in the economy needs to be nurtured through fiscal, monetary and sectoral policy levers.
• Definitions:

1. Repo and Reverse Repo Rate - Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security. The Reverse repo rate is the rate at which the RBI borrows money from commercial banks.
2. Bank Rate - It is the rate charged by the RBI for lending funds to commercial banks.
3. Marginal Standing Facility (MSF) - MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely. Under interbank lending, banks lend funds to one another for a specified term.
4. Inflation - It is the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. It measures the average price change in a basket of commodities and services over time, and is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.

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