Context- RBI in its 6th bi-monthly MPC meeting voted unanimously to maintain status quo on benchmark interest rates to support the economy.
What were the key highlights of latest MPC meeting?
The Monetary Policy Committee (MPC) recently left benchmark interest rates unchanged and maintained an ‘accommodative’ policy stance as it prioritized support for the economy’s recovery over ‘sticky’ inflation amid the COVID-19 pandemic.
- The RBI keeping rates low despite high inflation shows its focus to boost economic growth over keeping inflation under check which is majorly a supply-side issue.
- Decision – The MPC kept the RBI’s key lending rate, the repo rate, steady at 4%.
- MPC panel projected that the real GDP contraction will contract at 7.5% [-7.5%] for the financial year ending. It is an upgrade in comparison to -9.5% in October MPC review.
- Citing the improvement in activity in the second quarter, it projected GDP would return to growth of 0.1% in Q3, and expand 0.7% in Q4.
- The RBI also announced a raft of liquidity management measures and steps to improve regulatory oversight of the financial system.
- MPC expects inflation to rise in the near term.
What are the key challenges?
- Cost push pressure– The increase in the prices of iron ore, steel and transportation fuels also add to the worries that cost pressures are continuing to accumulate.
- Food inflation surges to double in October 2020 across protein-rich items including pulses, edible oils, vegetables and spices on multiple supply shocks.
- Booming financial markets and rising asset prices because of surplus liquidity will also contribute to upside risks.
- MPC’s policy approach is clearly fraught with risks. A small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes
- The RBI policy is supportive of growth and in sync with the government’s reform agenda.