Monetary Policy Report | 10 Apr 2020

Why in News

• The Reserve Bank of India (RBI) has released its Monetary Policy Report (MPR).
• The report follows the unscheduled monetary policy meeting held in end March, 2020 to discuss the uncertainties arising from the nationwide lockdown.
  
  • Since the review was conducted in end March, 2020, the early policy review, scheduled for April,2020 was withdrawn.

Key Points

• Inflation
  
  • The consumer price index (CPI)-based inflation, had stayed elevated in the last few months. It is expected to decrease during the course of the financial year.
  • CPI inflation is tentatively projected to ease from 4.8% in (Quarter)Q1 of 2020-21 to 4.4% in Q2, 2.7% in Q3 and 2.4% in Q4.
    
    • This may be due to the prevailing high uncertainty.
      
      • Aggregate demand may weaken further than currently anticipated and ease core inflation further.
      • Supply bottlenecks could increase pressures more than expected.
  • Estimates indicate that inflation could move in a range of 3.6-3.8% assuming a normal monsoon and no major exogenous or policy shocks.
• The RBI monetary policy:
  
  • The Repo Rate was reduce by 75 basis points (bps) to 4.4%
  • The Cash Reserve Ratio was reduced by 100 bps to 3%.
• However, the RBI refrained from making any prediction on growth. Forecasts for real Gross Domestic Product (GDP) growth in India were not provided due to prevailing uncertainties due to Covid-19.
• Improvements in inflation and growth are expected to emanate from monetary, fiscal and other policy measures and the early containment of Covid-19. However, there are uncertainties with these factors.
• Oil Price Drop
  
  • The sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade.
  • However, the gain from this channel is not expected to offset the impact of shutdown and loss of external demand.
• Exchange Rates
  
  • The global financial market volatility caused by the uncertainty of macroeconomic impact of the Covid-19, as in February-March 2020, could exert pressure on the Indian rupee.
  • Should the rupee depreciate by 5% from the baseline, inflation could increase by around 20 bps while GDP growth could be higher by about 15 bps through increased net exports.
  • In contrast, should Covid-19 normalise quickly, strong capital flows could revive.
  • An appreciation of the rupee by 5% could moderate inflation by around 20 bps and GDP growth by around 15 bps vis-a-vis the baseline.

Source: TH