CASE STUDY - The Reserve Bank of India (RBI), cut Repo Rate to 4.4%, the lowest in atleast 15 years. Also, it reduced the Cash Reserve Ratio (CRR) maintainedby the banks for the first time in over seven years. CRR for all banks was cut by 100 basis points to release ₹ 1.37 lakh crores across the banking system. RBI governor Dr. Shaktikanta Das predicted a big global recession and said India will not be immune. It all depends how India responds to the situation. Aggregate demand may weaken and ease core inflation. The Economic Times; March 27th, 2020
Answers
Explanation:
hGovernor’s Statement, February 5, 2021
The Monetary Policy Committee (MPC) met on 3rd, 4th and 5th February, 2021 and deliberated on current and evolving macroeconomic and financial developments, both domestic and global. The MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent. It also unanimously decided to continue with the accommodative stance of monetary policy as long as necessary – at least through the current financial year and into the next year – to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward. The Marginal Standing Facility (MSF) rate and the Bank rate remain unchanged at 4.25 per cent. The reverse repo rate stands unchanged at 3.35 per cent.
2. I would like to first set out briefly the broad contours of the MPC’s decision making process and its underlying motivation. Inflation outturns in the last two months have turned out to be better than what was expected at the time of the December meeting. For the first time during the COVID-19 period, inflation has eased below the upper tolerance level of 6 per cent. Going ahead, factors that could shape the food inflation trajectory in coming months, including the likely bumper kharif harvest arrivals in markets, rising prospects of a good rabi crop, larger winter supplies of key vegetables and softer poultry demand on fears of avian flu are all indicative of a stable near-term outlook.
3. The preliminary estimate of GDP for 2020-21 released by the National Statistical Office (NSO) on January 7, 2021 has turned out to be very close to the MPC’s December projection. The outlook on growth has improved significantly, with positive growth impulses becoming more broad-based, and the rollout of the vaccination programme in the country auguring well for the end of the pandemic. Given that inflation has returned within the tolerance band, the MPC judged that the need of the hour is to continue to support growth, assuage the impact of COVID-19 and return the economy to a higher growth trajectory.
Assessment of Growth and Inflation
4. The new year 2021 has begun on a strong positive note with vaccination drives in major economies as well as in India. India’s response to COVID-19 reminds us of an excerpt from Mahatma Gandhi’s proclamation that “determined spirits fired by an unquenchable faith in their mission can alter the course of history1.” While the year 2020 tested our capabilities and projects in 2020-21 has doubled year-on-year.
6. What is more, the flow of financial resources to the commercial sector has been improving, particularly in respect of non-food bank credit and via commercial paper (CPs), credit by housing finance companies, private placement5 lakh crore this year so far (up to January 15, 2021), compared with ₹7.97 lakh crore during the corresponding period ofst year. The latest bank lending survey of the RBI suggests further sequential improvement in sentiment on loan demand across all sectors right up to Q2:2021-22. Taking these factors into consideration, real GDP growth is projected at 10.5 per cent in 2021-22 – in the range of 26.2 to 8.3 per cent in H1 and 6.0 per cent in Q3.
7. The Union Budget 2021-22 has provided a strong impetus for revival of sectors such as health and well-being, infrastructure, innovation and research, among others. This will have a cascading multiplier effect going forward, particularly in improving the investment climate and reinvigorating domestic demand, income and employment. The investment-oriented stimulus under AatmaNirbhar 2.0 and 3.0 (given during the peak of the pandemic) has started working its way through and is improving the spending momentum along with the quality of public investment. Both will facilitate regaining India’s growth potential over the medium-term. The into consideration all these factors,