MONETARY POLICY REPORT

  • The Reserve Bank of India (RBI) has released the Monetary Policy Report (MPR) for the month of August 2021.
  • It kept the policy rate unchanged for the seventh time in a row. And appealed to the centre and states to reduce taxes on fuels to curb inflationary pressures.

Monetary Policy Report

  • The MPR is published by the Monetary Policy Committee (MPC) of RBI.
  • The MPC is a statutory and institutionalized framework under the RBI Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.
  • The MPC determines the policy interest rate (repo rate) required to achieve the inflation target of 4% with a leeway of 2% points on either side.
  • The Governor of RBI is ex-officio Chairman of the MPC.

Important points:

  1. Repo Rate – 4%.
  2. Reverse Repo Rate – 3.35%.
  3. Marginal Standing Facility (MSF) – 4.25%.
  4. Bank Rate- 4.25%.

Real Gross Domestic Product (GDP) growth for 2021-22 has been retained at 9.5%.

  • RBI has revised the projection for Consumer Price Index (CPI) inflation to 5.7% from 5.1%.
  • In order to absorb additional liquidity in the system, the RBI announced conducting a Variable Rate Reverse Repo (VRRR) program due to the higher yield prospects as compared to the fixed rate overnight reverse repo.
  • The RBI has decided to increase the quantum under the VRRR to Rs 4 trillion in a phased manner.
  • It also extended the liquidity support to banks to lend to stressed businesses by another three months to 31th December 2021.
  • Elevated inflation level and delayed recovery in the economy has prompted the panel to keep rates steady. Interest rates in the banking system are expected to remain stable in the next couple of months.
  • Recovery faced rough weather due to the Covid second wave and lockdowns in states
  • It decided to continue with an accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.
  • An accommodative stance means a central bank will cut rates to inject money into the financial system whenever needed.

Key Terms

Repo and Reverse Repo Rate:

  • Repo rate 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. Here, the central bank purchases the security.
  • Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.

Bank Rate:

It is the rate charged by the RBI for lending funds to commercial banks.

Marginal Standing Facility (MSF):

  • MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.
  • Under interbank lending, banks lend funds to one another for a specified term.

Inflation:

  • Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
  • Inflation measures the average price change in a basket of commodities and services over time.
  • Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.

Consumer Price Index:

  • It measures price changes from the perspective of a retail buyer. It is released by the National Statistical Office (NSO)
  • The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.

SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT

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