The Monetary Policy Committee of the RBI announced that it will keep the status quo in its key...
With an intention to regulate the liquidity aspect in the country, the RBI Monetary Policy meeting paved the way to key reforms for the economy. Initially, the RBI Monetary Policy meeting was scheduled between the dates of 29 September 2020 to 1 October 2020. However, the appointment of an external panel of members led to this delay.
Due to this delay in the appointment, the Central Government asked the RBI to reschedule the meeting to October 2020. The outcome of this meeting would decide the future of liquidity in the country. Prominent economists have forecasted that not much will change from this meeting. This write up will focus on the prominent features of the RBI monetary policy meeting.
Initially, the meeting was supposed to be held between the dates of 29 September 2020 to 1 October 2020. Prominent members of this meeting included Dr Ashima Goyal, Professor Jayanth R. Varma and Dr Shashanka Bhide. This meeting was held between the dates of 7 October 2020 to 9 October 2020
The Main Agenda of the RBI Monetary Policy meeting was to analyse and discuss the macroeconomic and microeconomic conditions of the country, which were caused due to the outbreak of Covid-19. Central banks across the world have taken a similar stance in injecting liquidity into the country. Apart from this, the RBI monetary policy committee also discussed several provisions related to the liquidity stance faced by the country.
The following were the key points discussed in the RBI Monetary Policy Meeting:
Repo is an abbreviation for the Repurchase Rates at which the central bank lends money to scheduled commercial banks. So basically Repo rate is the rate at which the central bank of the country lends funds to scheduled commercial banks. This situation will only arise if there is some form of shortage of funds. Scheduled commercial banks will borrow the money from the Central bank by selling specific securities to the RBI.
Repo rate is considered as the rate at which the Reserve bank lends money to a scheduled commercial bank for securities. Reverse repo rate is the opposite of repo rate. It is the rate at which the RBI takes money from Scheduled commercial banks. In a reverse repo rate system, the RBI would sell securities to scheduled commercial banks.
Some of the highlights which were discussed by the RBI governor, Mr Shaktikanta Das, along with the members of the monetary policy meeting were as follows:
The RBI monetary policy committee considered the above policy changes. These effects were due to the devastating impact of the Covid-19 situation and the rise of infections in the country, urged the Government to bring the country to a standstill. However, Central banks across the world have taken a stance to address the effects caused by the Covid-19 pandemic.
The Government opened the doors of India in June 2020 intending to reduce the economic damage caused by the lockdown. There was a global downturn in the economy, with unemployment rates high throughout the world. During the second financial quarter, the economic slowdown was brought out by the COVID-19 pandemic.
The RBI monetary policy committee deems that this effect would only be until the 4th quarter of 2020. When the country opened its doors, there were positive signs of revival for the Indian economy. However, the MPC stressed their intentions to ensure that the current policy rates prevail in the economy with a view of positive growth outlook.
First and foremost, the Indian economy is in the planning phase to tackle the effects caused by the Covid-19 Pandemic. Several decisive features which were brought out by the RBI monetary policy would include the amount of liquidity injected into the economy and the stance taken by lending institutions to renegotiate their policies with borrowers. This is the current phase what is faced by the Indian economy.
With the opening of the Indian economy, export patterns across the country has developed. Apart from this, there is a requirement of policy development, especially in the area of borrowing and lending.
The Indian Economy has shifted its focus from thinking about the effects of Covid-19 to tackling the issue. Predominantly the focus has to be on the revival of the economy.
1. Rural Economy- As per the report of the RBI Monetary Policy Committee, the rural economy and environment looks resilient. The amount of Kharif Crops grown surpassed the amount sown last year. This also affected the number of crops which were exported outside India. Apart from this, there are other factors which contributed to the development of the rural economy.
This will include the following:
Analysis has provided that the amount of food and grain production in India will drastically increase in the year 2020-21. This will directly affect the employment of agriculture and rural workers in farms and other forms of sectors. Such benefits will lead to the creation of jobs especially for the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA)
Apart from this, the above act and schemes under it have developed income and created jobs in different sectors such as the agriculture and rural sector.
2. Urban Development– The RBI monetary policy have analysed that there is growth in the urban sector.
Some of the factors which affected urban growth are:
3. Residential and Commercial Property Sector– As per a survey taken in 2020, it is expected that the level of inflation would affect the household community. This level is said to be on the rise. However, the RBI monetary policy committee has indicated that this inflation increase level would stop at some point in time. In the next three months, the level of inflation affecting the residential and commercial premises sector is said to decline. As per the analysis conducted by the RBI, the inflation level is bound to reduce during the fourth quarter of 2020-21. Consumer confidence and the spending pattern will also change when it comes to the residential sector.
4. Other Sectors– Any other sectors which contribute to the development of the economy, which include the forward-moving sectors such as exports, employment opportunities, production and other activities such as capacity utilization are said to increase.
5. Manufacturing Sector– As per the survey and results established by the Manufacturing Purchasers Managers Index (PMI), show that the level of purchases for the manufacturing sector has increased to 56.8. This figure is one of the largest since the financial year 2012-13. This index estimates that manufacturing industries have more form of orders and supplies in the market. When it comes to the PMI index for the services sector, this has increased to 49 from the previous month figure of 41. Such figures indicate that the GDP level is supposed to improve in the fourth quarter
6. Economic Recovery– As per the survey conducted by the RBI, representatives thinks that the economy will recover at a K-Shaped recovery. K- Shaped economy will include all sectors of the economy reviving at different time and pace. However, the RBI predicts that the economy will recover at a three-speed level. Some sectors as the BFSI (Banking, Finance and Insurance Services) Sector has shown resilience in the development process. Moreover, these sectors have proved in the past to be labour intensive.
7. FMCG (Fast Moving Consumer Goods)– This FMCG sector has also witnessed growth after the country has opened up. This sector will include the rural sector such as the Agriculture sector, Pharmaceutical Sector, electricity generation sector and other renewable sectors. Agriculture sectors would include the amount of investment in Cold Storage activities and Agritech investors. All these initiatives would definitely improve the FMCG sector. Other form of initiatives has increased the amount of fresh investment in the country.
8. Other Sectors– Some sectors, which include the high customer-facing sectors, will take time to improve as more amount of social distancing norms, are put forth in the country.
9. As mentioned earlier, specific sectors, such as agriculture dominated, would improve the rural sector by creating more amounts of jobs. Other sectors which include manufacturing firms, have forecasted that the amount of capacity utilisation would help the firms recover by the fourth quarter of 2020.
10. Investment Activity– With the government bringing a ban on FDI (Foreign Direct Investment) from countries that share land borders with India, the amount of investment from countries, especially China, is set to deplete. Now firms in China would have to take prior approval from the government for any form of investment activity in India. This will delay any form of investment which comes through the automatic route. However, the amount of investment coming from other countries such as the USA and the EU outweighs the investment from countries that share land borders with India.
11. Financial Injection– As a part of initiatives started by the government, the financial injection has also been introduced. This injection is for all sectors which affect the economy. As a part of this initiative, the renegotiation of loans has also been included.
Hence the RBI monetary policy has brought out different initiatives to mitigate the devastating effects caused by Covid-19. Moreover, these initiatives have brought out to revive the Indian economy.
Read our article:Liquidity Changes by RBI Monetary Policy Committee