RBI – Monetary Policy Review - Feb 2022
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RBI's Monetary policy – Feb 2022 update
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- The story: The Reserve Bank of India’s bi-monthly Monetary Policy Committee (MPC) voted unanimously to keep both repo rates and reverse repo rates unchanged. This was the tenth time in a row, that the MPC did not make any modifications in rates. The RBI had last revised its policy repo rate or the short-term lending rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.
- Repo Rate: The Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
- Reverse Repo Rate: The reverse repo rate is the rate at which the RBI borrows money from the banks in the short term. The RBI borrows money from the banks to suck out the excess liquidity in the system. It pays interest on the same.
- Key points: The RBI said it will keep maintaining an accommodative stance and will continue with it as long as necessary for a “durable and broad-based recovery” citing concerns over inflation and new Covid-19 omicron variant. The Repo was left unchanged at 4% while the reverse repo rate is 3.35%. The RBI last revised the policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low. The MPC also opted to keep the marginal standing facility (MSF) unchanged at 4.25%, and bank rate also remained unchanged at 4.25 percent.
- Inflation and growth outlook: The RBI now sees FY23 growth at 7.8%. Further, it has forecast Q1FY23 growth at 17.2%, Q2 at 7%, Q3 at 4.3%, and Q4 at 4.5%. The CPI inflation forecast for FY22 has been retained at 5.3%. The MPC noted that inflation is likely to moderate in H1:2022-23 and move closer to the target rate thereafter, providing room to remain accommodative. Timely and apposite supply side measures from the Government have substantially helped contain inflationary pressures. The potential pick up of input costs is a contingent risk, especially if international crude oil prices remain elevated. The pace of the domestic recovery is catching up with pre-pandemic trends, but private consumption is still lagging.
- RBI's global assessment: Since the MPC’s meeting in December 2021, the rapid spread of the highly transmissible Omicron variant and the associated restrictions dampened global economic activity. The global composite purchasing managers’ index (PMI) slipped to an 18 month low of 51.4 in January 2022, with weakness in both services and manufacturing. World merchandise trade continues to grow. There are, however, headwinds emanating from persistent container and labour shortages, and elevated freight rates. In its January 2022 update of the World Economic Outlook, the International Monetary Fund (IMF) revised global output and trade growth projections for 2022 downward to 4.4 per cent and 6.0 per cent from its earlier forecasts of 4.9 per cent and 6.7 per cent, respectively.
- Domestic economy assessment: The first advance estimates (FAE) of national income released by the National Statistical Office (NSO) on January 7, 2022 placed India’s real gross domestic product (GDP) growth at 9.2 per cent for 2021-22, surpassing its pre-pandemic (2019-20) level. All major components of GDP exceeded their 2019-20 levels, barring private consumption. In its January 31 release, the NSO revised real GDP growth for 2020-21 to (-) 6.6 per cent from the provisional estimates of (-) 7.3 per cent.
- Summary: Global central banks, including the US Federal Reserve and the European Central Bank (ECB) have turned hawks and are expected to hike rates soon. Bank of England has already hiked rates two consecutive times. In India too, analysts had expected the RBI to raise the reverse repo rate by about 15-40 basis points while penciling measures to support the Union Budget that pump primed growth with larger capex and record market borrowings. The contrary move of RBI is guided by “durable and broad-based recovery”.
- EXAM QUESTIONS: (1) The monetary Policy of Reserve Bank of India, which is based on inflation objective, needs reforms now. Comment. (2) Comment on the accommodative stance by RBI in current monetary policy. Discuss how it will be helpful to recover the economy hit by COVID-19 pandemic.
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