InvestorQ : What were the key features of the monetary policy announced on 05 February?
Tisha Malhotra made post

What were the key features of the monetary policy announced on 05 February?

Aashna Tripathi answered.
3 weeks ago

The monetary policy discussions began with the MPC deliberating on the rates, the liquidity and other issues. The 3 day policy debate stretched across from 03-Feb to 05-Feb. Eventually, this debate culminated into the monetary policy on 05-Feb. Here are the key highlights of the monetary policy announcement.

· The monetary policy was essentially a reiteration of the previous stance to keep repo rates low to stable and make liquidity available in abundant measure.

· Repo rate remains at an all-time low level of 4% and even the reverse repo rate stays at 3.35%. This is the benchmark rate and sets the tone for interest rates in the market.

· Reverse repo is the rate that banks earn on their deposits with the RBI. Normally, reverse rates are kept low to discourage banks from holding too much cash with the RBI deposits and instead to deploy the money into lending to business.

· This has an impact on the bank rate which is the base lending rate on the economy. The bank rate is normally at a 25 basis points spread above the repo rate. This retains the bank rate at 4.25% and also the Marginal Standing Facility or the MSF rate at 4.25% too.

· The monetary stance has clarified that the accommodative will stay for the time being but also underscored what the RBI said in the last 2 policies with the phrase “as long as is required”.

· In the latest monetary policy, the MPC also gave a time line that the stance would remain accommodative in this fiscal and also through most of next fiscal; probably till Dec 2021 for sure. That is good news for the markets as it gives stability.

· The outlook for headline inflation for FY21 has been revised to 5.2% and that is at least 250 basis points lower than the average we saw in the last few months. Interestingly, the food inflation expectations are among the lowest in the light of good crop output.

· GDP growth rate for FY22 has been upgraded by the MPC to 10.5%, although the growth for FY21 remains at -7.5%. The MPC expects agricultural output to sustain growth rate at 3.5% while a sharp rebound is expected in industrial output and services sector in FY22.

· In the previous occasions, Jayant Varma had put up a note of dissent on the trajectory of accommodation. However, this time around, there was total consensus among the 6 members of the MPC. They voted unanimously to hold the repo rates at 4% and also to continue the accommodative monetary stance, without any divergence for the time being.