RBI Monetary Policy 2021

Why in News

Recently, the Reserve Bank of India (RBI) has forecasted that real Gross Domestic Product (GDP), hit by the Covid pandemic in 2020-21, is expected to grow by 10.5% in 2021-22.

• RBI had previously introduced a number of measures in its Monetary Policy Report for dealing with the Covid-19 induced economic setback.

Key Points

• GDP Forecast:
  
  • The 10.5% real GDP growth in 2021-22 forecasted by RBI will move in the range of 26.2 to 8.3% in the first half and 6% in the third quarter of 2021.
    
    • Hit by lockdown and closures of industries, GDP had contracted by 23.9% in the June quarter of 2020-21 and fell by 7.5% in the September quarter of 2020-21.
    • Real GDP is a measurement of economic output that accounts for the effects of inflation or deflation.
      
      • The difference between nominal GDP and real GDP is the adjustment for inflation. Since nominal GDP is calculated using current prices, it does not require any adjustments for inflation.
• Reasons for a Positive Outlook:
  
  • Rural demand is likely to remain resilient on good prospects of agriculture.
  • Urban demand and demand for contact-intensive services is expected to strengthen with the substantial fall in Covid-19 cases and the spread of vaccination.
  • Consumer confidence is reviving, and business expectations of manufacturing, services and infrastructure remain upbeat.
  • The fiscal stimulus under AtmaNirbhar 2.0 and 3.0 schemes of the government will likely accelerate public investment.
  • The Union Budget 2021-22, with its thrust on sectors such as health and well-being, infrastructure, innovation and research, etc. should help accelerate the growth momentum.
• Unchanged Policy Rates:
  
  • The RBI has kept the repo rate under the Liquidity Adjustment Facility (LAF) unchanged at 4%.
  • The reverse repo rate under the LAF remains unchanged at 3.35% and the Marginal Standing Facility (MSF) rate and the Bank Rate at 4.25%.
• Other Decisions:
  
  • Cash Reserve Ratio (CRR):
    
    • The RBI has decided to restore the CRR in a non-disruptive manner from 3% to 4% in two stages by May 2021.
  • Direct Retail Investment in Government Securities (G-Sec):
    
    • The RBI has proposed to allow small investors direct access to the G-Sec platform.
      
      • A G-Sec is a tradable instrument issued by the Central Government or the State Governments and is considered to be the safest form of investment.
• Accommodative Stance:
  
  • The Monetary Policy Committee (MPC) of the RBI also decided to continue with the accommodative stance as long as necessary to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.
  • These decisions are in consonance with the objective of achieving the medium-term target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2 %, while supporting growth.
    
    • The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.
    • The CPI has several sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear.

Source:IE