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The Reserve Bank of India left the repo rate unchanged at 4% in its monetary policy committee meeting. The MPC maintains an accommodative stance. 

The reverse repo rate also stands unchanged at 3.35%.

The members of the MPC voted unanimously in favour of the decision.

The RBI is maintaining the accommodative stance since February 2019 MPC meeting. The MPC has decided to continue with this stance “at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of COVID19 on the economy while ensuring that inflation remains within the target going forward.”

This was the 25th MPC meeting since MPC’s inception in June 2016. The meeting lasted for three days between October 7 and 9. The panel was headed by Mr Shaktikanta Das with other members of the panel: Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Mridul K. Saggar and Dr. Michael Debabrata Patra.

This is a six-member panel that assesses the condition of macroeconomic situations. On the final day of the meeting, the MPC decides upon various factors for the economy and issues out for the public.

What is Meant by Accommodative Stance and Why is it Necessary?

An accommodative stance means that there is room for lowering of interest rates in the future to revive growth and demand in the economy.

Even as the central government and the central bank have worked for hand in hand to revive the economy and provide financial support, the economy still recovering from the covid-19 impact with rising cases. Even though inflation has been above RBI’s targets but the supply and cost pressures continue.

Therefore RBI decided to remain status quo on the rates and await inflationary pressures to ease before it takes any action to fuel growth. RBI requires more headroom to deal with policy measures. Hence, the accommodative stance.

Policy Rates
Repo Rate4%
Reverse Repo Rate3.35%
Marginal Standing Facility4.25%
Bank Rate4.25%

What Does this Mean for You?

MPC maintaining the repo rates at 4% means that the rate at which banks borrow money from the central bank remains as is. Generally, when RBI lowers the repo rate, commercial banks are supposed to lower interest rates they offer on loans given to you.

Interest rates are decided in consonance with the inflation in the economy. In August, CPI was reported at 6.69%, which above the RBI mandated band of 2-6%.

MPC’s Outlook on Growth and Inflation

Inflation

RBI expects the cost-push inflation trend to continue. Weak pricing power, subdued demand, supply disruptions are a few reasons being pointed out by the central bank to explain the rise in costs. However, the RBI does expect costs to improve with easing lockdown restrictions. Keeping all this mind, RBI expects the inflation for the second quarter at 6.8% and gradually reduce in future.

Outlook on certain essentials

  • Pricing pressure on key vegetables like tomatoes, onions and potatoes should reduce by Q3 with the onset of the Kharif season.
  • Prices of pulses and oilseeds may remain firm due to high import duties. 
  • Domestic oil prices may remain higher in the absence of any rollback of taxes. 

Growth

The rural economy may recover however the same in the urban economy may suffer a lag due to the social distancing norms and rising infections. Private investment and exports may remain under pressure due to subdued external demand.

As a consequence of these factors, GDP growth in 2020-21 is expected at -9.5% by RBI. However, the RBI does expect the GDP to bounce back marginally in Q4 with a positive 0.5%.

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