RBI Monetary Policy 2021

In News

The Monetary Policy Committee (MPC) of RBI has kept Repo Rate unchanged at 4% for the seventh time in a row.

About

• Marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25%. 
• The reverse repo rate also remains unchanged at 3.35%.
• CPI inflation is now projected at 5.7% during 2021-22.
• RBI has maintained the growth forecast at 9.5 per cent.

Rationale behind Keeping Policy Rate unchanged

• Accommodative stance of RBI: 
  • It means RBI aims to make interest rates low enough.
  • It will spur strong enough economic growth to reduce unemployment or to prevent unemployment from rising.
• RBI is aiming to revive and sustain growth on a durable basis.
• It may help in neutralising the adverse impact of COVID-19 on the economy.
  • While ensuring that inflation remains within the target, going forward.

Challenges of this Policy

• Rising inflation: Excess inflation may create uneasiness pushing many below the poverty line.
• Stagflation: Inflation is high plus high unemployment may occur in near future.

Way out

• Constant monitoring of macro economic situation by RBI.
• Increased spending by the Government may boost the economy.

What is Policy Rate/ Repo Rate and other terms mentioned above?

• Repo Rate: It 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. 
  • Repo stands for ‘repurchase option’ or ‘repurchase agreement’.
  • The central bank provides these short term loans against securities such as treasury bills or government bonds.
  • It is commonly known as Policy Rate too.
  • Repo rate is used by monetary authorities to control inflation.
  • The government increases the repo rate when they need to control prices and restrict borrowings. 
  • On the other hand, the repo rate is decreased when there is a need to infuse more money into the market and support economic growth.
• Reverse Repo Rate: This is the rate the central bank of a country pays its commercial banks to park their excess funds in the central bank.
  • The reverse repo rate provided by RBI is generally lower than the repo rate.
  • While repo rate is used to regulate liquidity in the economy, reverse repo rate is used to control cash flow in the market. 
  • When there is inflation in the economy, RBI increases the reverse repo rate.
    • It encourages commercial banks to make deposits in the central bank and earn returns.
• Marginal Standing Facility: MSF or marginal standing facility is a system of the Reserve Bank of India that allows scheduled commercial banks to avail funds overnight.
  • It was introduced by the RBI as a provision for banks to avail overnight funds during a revision of the country’s monetary policy in 2011-12.
  • It is usually higher than the repo rate.
  • Banks can use their SLR or statutory liquidity ratio to take loans under MSF. 
    • This is a short-term loan used to maintain the liquidity of banks.
• Consumer Price Index (CPI) Inflation: 
  • It measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.
  • It also represents retail inflation.
  • In India, five types of CPI are published.

Source: LiveMint

Source: IE