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Monetary Policy Committee – Highlights

Monetary Policy Committee - Highlights

UPSC CSE Mains Syllabus -GENERAL STUDIES-3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Monetary Policy Committee – Highlights

In news:

  • Given the current situation, revival of the economy will be a priority for them.
  • The MPC has decided to look through the current inflation hump as transient and address the more urgent need to revive growth and mitigate the impact of the pandemic on the economy.
  • However, they are keeping an eye on inflation and expect it to come down within the targeted range by Q3-Q4 of FY2021.
  • Therefore, the overall policy announcements should be viewed in the context of focus on growth.
  • Further, the central bank knows very well that the government does not have too much headroom on the fiscal front given that the revenue is coming down and the expenditure is going up.
  • Therefore, it is important to support the economy through monetary policies rather than through fiscal stimulus.

MPC meeting highlights:

  • Benchmark lending rate kept unchanged at 4 pc.
  • Indian economy expected to contract 9.5 pc this fiscal with downside risks
  • Contraction 9.8 per cent projected in July-September; 5.6 pc in October-December and rebound in growth at 0.5 per cent in March quarter
  • GDP growth for April-June quarter 2021-22 fiscal projected at 20.6 pc
  • Accommodative monetary policy stance maintained to support growth
  • Indian economy entering into decisive phase in fight against coronavirus, focus must shift from containment to reviving economy
  • Contraction in economic growth of Q1 behind; silver linings are visible
  • GDP growth may break out of contraction and enter positive zone by March quarter of current fiscal
  • Inflation to remain elevated in September quarter, but ease gradually towards the target over December and March quarters
  • Retail inflation projected at 6.8 per cent for September quarter.
  • Current inflation hump transient; agriculture outlook looks bright, oil prices to remain rangebound.
  • RTGS fund transfer system for real-time fund transfer to become 24X7 from December. It is noteworthy that while being very focused on the immediate task of managing growth through monetary measures, RBI has not lost sight of long-term structural initiatives.
  • Threshold for aggregate exposure of retail bank loans to one counterparty increased to Rs 7.5 crore from Rs 5 crore
  • System-based automatic caution-listing for exporters discontinued to help them negotiate better terms with overseas buyers
  • Comfortable liquidity position to be maintained; Rs 20,000 crore-OMO auction next week
  • On-tap targeted long-term repo operations (TLTRO) to be conducted, with tenors of up to three years for Rs 1 lakh crore at a floating rate linked to the policy repo rate up to March 31, 2021.
  • All MPC members vote for keeping the policy repo rate unchanged and continue with the accommodative stance.
  •  State government finances :

The state government finances are also extremely stretched. To facilitate the borrowing by the state government, for the first time, the central bank has announced OMOs in State Development Loans (SDLs). This is an extremely innovative method suggested by the RBI, which will also facilitate efficient pricing for the states.

 Housing and real estate sector:

In a boost for the housing and real estate sector, the RBI has changed the risk weights on housing loans to individuals. Under the current framework, differential risk weights are applicable to individual housing loans, based on the size of the loan as well as the loan-to-value ratio (LTV). RBI has now rationalized the risk weights for all new housing loans sanctioned up to March 31, 2022 and linked them to LTV ratio only. This will facilitate cheaper home loans and give a fillip to the real estate sector.

Using monetary tools to boost growth and to address some of the immediate needs, and at the same time focusing on long-term strategic projects, the policy statement is indeed powerful.

Source: ”Economic Times”.

POSSIBLE UPSC MAINS EXAMINATION:

Putting to rest the debate on growth versus inflation, the RBI has articulated its policy extremely well in times of volatile situation. Discuss.