Key Highlights of the RBI Monetary Policy 2021

Ashish M. Shaji

07 Jun, 2021

The Monetary Policy Committee of the RBI announced that it will keep the status quo in its key rates. It has left the repo rate unchanged at 4%. The Monetary Policy Committee maintains an accommodative stance. This meeting was the second MPC meeting of the FY 2021-22. In this article, we shall take a look at the highlights of the RBI monetary policy 2021.

What do you mean by RBI Monetary Policy 2021?

This monetary policy is formulated by the central bank, i.e., the Reserve Bank of India. It relates to the monetary matters of the country. This policy involves measures that are taken to regulate the supply of money, availability and cost of credit in the economy. 

This policy also oversees the distribution of credit among users and borrowing and lending rates of interest. For a developing country like India, the monetary policy is critical for the promotion of its economic growth. 

RBI Monetary Policy 2021: MPC Announcements

The following announcements were made as part of the RBI monetary policy 2021:

• It has left repo rate unchanged at 4%;
• The reverse repo rate is also unchanged @ 3.35%;
• Besides these, the MPC also decided to maintain the bank rates the same @ 4.25%;
• The economic growth forecast was cut to 9.5% for the current fiscal from the previous 10.5%;
• The MPC of the Reserve Bank projected the consumer price inflation at 5.1% during the FY 2021-22;
• The dent in the urban demand and the infection spread in rural India poses a risk to the normalization of the economy;
• It observed that the mobility indicators declined but were seen above the levels of the last year;
• Further, on assessing the growth and inflation, the MPC observed that India’s export in the months of March, April and May have been on an upswing;
• As per the RBI governor, the RBO took many steps to inject liquidity into the economy as it conducted Open Market Operations regularly to the tune of 36545 crore rupees till May 31. This was in addition to the 60k crore rupees under the G-SAP 1.0^[1];
• He also highlighted that the foreign exchange reserves of the country touched 598.2 billion dollars as of May 28. The forex reserves is close to reaching 600 billion dollars;
• Policy measures formulated by the monetary policy committee panel to boost the economic recovery include opening of 15k crore rupees window till March 2022. Banks may extend fresh lending support to restaurants, adventure and heritage, private bus operators, rental car service providers, aviation ancillary etc. in the hospitality industry that incurred colossal damage from the Covid-19 pandemic;
• With a view to further support the Micro, Small and Medium Enterprises, the Reserve Bank has lent an amount of 50k crore rupees support to all Indian financial institutions. Out of this, 15k crore rupees support is extended to the Small Industries Development Bank of India for aid to the Micro, Small and Medium Enterprises;
• The Monetary Policy Committee voted unanimously to keep the repo rate unchanged and maintain an accommodative stance.

Meaning of Accommodative Stance

The Monetary Policy Committee decided to maintain an accommodative stance. Here accommodative stance means that there is space for lowering the interest rates in the future to revive growth and demand in the economy.

The MPC decided to continue with this stance until India tackles the impact of the Covid-19 pandemic on our domestic economy. It has to be done to make sure that inflation remains within the target band of RBI.

Why didn’t the RBI change the policy rates?

The GDP of India for the Financial Year 2021 contracted at -7.3%. Although signs of a normal southwest monsoon and global recovery momentum might aid domestic economic activity, the spread of the Covid-19 disease in rural and urban areas continues to pose colossal risk.

The lowering of inflation in the month of April was a relief, but the rising fuel prices might adversely affect the coming days. Keeping these things in mind, MPC observed that the economy requires the policy support.

Conclusion

The monetary policy 2021 meeting lasted for three days. The RBI has kept its policy rates unchanged for the 6^th consecutive time, and that too at record lows. The Monetary Policy Committee (MPC) also decided to continue with an accommodative stance to mitigate the impact of Covid-19 on the economy. The Indian economy rose by 1.6% in the Jan-Mar quarter from the previous year. However, it saw a contraction of 7.3% for the entire fiscal year, which is its worst in close to 40 years.

Read our article: Revised RBI Monetary Policy: Key Updates