AIR SPOTLIGHT: BI-MONTHLY MONETARY POLICY REVIEW OF RBI

CONTEXT:

• The Monetary Policy Committee (MPC) voted unanimously to keep the policy repo rate unchanged at 4 per cent.
• The MPC decided to continue with the 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.
• The marginal standing facility (MSF) rate and the Bank Rate remain unchanged at 4.25 per cent.
• The reverse repo rate also remains unchanged at 3.35 per cent.

 

HIGHLIGHTS OF THE REVIEW:

• The MPC flagged the potential downside risks to economic activity from the highly contagious Omicron variant.
• There is some loss of momentum in economic activity as reflected in high frequency indicators such as purchasing managers’ indices for both manufacturing and services, finished steel consumption and sales of tractors, two wheelers and passenger vehicles.
• The demand for contact-intensive services is still muted.
• Going forward, positive impulses for quickening the pace of recovery emanate from buoyant Rabi prospects, robust export demand, accommodative monetary and liquidity conditions, improving credit offtake, and the continued push on capital expenditure and infrastructure in the Union Budget 2022-

Domestic Growth

• Real GDP growth at 9.2 per cent for 2021-22 takes it modestly above the level of GDP in 2019-20.
• Private consumption, the mainstay of domestic demand, continues to trail its pre-pandemic level.
• The persistent increase in international commodity prices, surge in volatility of global financial markets and global supply bottlenecks can exacerbate risks to the outlook.
• Real GDP growth is projected at 7.8 per cent for 2022-23.

Inflation

• Softening of food prices is providing welcome relief. The improving prospects for foodgrains production and the expected easing of vegetable prices on fresh winter crop arrivals are adding further optimism.
• Moreover, the softening of pulses and edible oil prices is likely to continue in response to strong supply side interventions by the Government and increase in domestic production.
• The hardening of crude oil prices, however, presents a major upside risk to the inflation outlook.
• inflation projection for 2021-22 is retained at 5.3 per cent, CPI inflation for 2022-23 is projected at 4.5 per cent

Financial Stability

• The balance sheets of Scheduled Commercial Banks (SCBs) are relatively stronger with higher capital adequacy, reduced NPA, higher provisioning cover and improved profitability than in the previous years.
• Banks and other financial entities to further strengthen their corporate governance and risk management strategies. They also need to continue the process of capital augmentation and building up of appropriate buffers.

Liquidity and Financial Market Conditions

• The pandemic has delivered a once in a century crisis, with a health shock morphing into a macroeconomic and financial shock.
• The RBI undertook a slew of measures to deal with such an exceptional situation.
• With these objectives being achieved on an ongoing basis, the Reserve Bank has turned to rebalancing liquidity on a dynamic basis, while maintaining adequate liquidity in support of its accommodative stance.
• This rebalancing has involved two-sided operations: first, rebalancing liquidity from the overnight fixed rate reverse repo towards the 14-day variable rate reverse repo (VRRR) auction as the main operation and second, conducting repo auctions of 1-3 day maturities to meet transient liquidity mismatches and shortages.
• With the progressive return of normalcy, including transient demand for liquidity from the RBI, it is logical to restore the revised liquidity management framework in order to make it more flexible and agile.
• India’s external sector sustainability is anchored by high foreign exchange reserve buffers and a modest level of the current account deficit (CAD). In H1:2021-22, the CAD was 0.2 per cent of GDP.

Additional Measures

• On-tap liquidity facilities of ₹50,000 crore and ₹15,000 crore for emergency health services and contact-intensive sectors, respectively, are being extended from March 31, 2022 to June 30, 2022.
• The Voluntary Retention Route (VRR) scheme was introduced to facilitate long-term investment by Foreign Portfolio Investors (FPIs) in debt securities issued by the government and the corporates. It is proposed to enhance the limit for investments under the scheme by ₹1.0 lakh crore from ₹1.5 lakh crore at present to ₹2.5 lakh crore with effect from April 1, 2022.
• Final Credit Default Swaps (CDS) Guidelines issued.
• It has been decided to allow banks in India to undertake transactions in the offshore Foreign Currency Settled-Overnight Indexed Swap (FCS-OIS) market with non-residents and other market makers.
• It is now proposed to increase the cap of e-RUPI vouchers issued by the Central government and State governments from ₹10,000 to ₹1,00,000 per voucher
• Enabling Better Infrastructure for MSME Receivables Financing – Increasing NACH Mandate Limit for TReDS Settlements
• Master Direction (MD) on IT Outsourcing and Master Direction (MD) on Information Technology Governance, Risk, Controls and Assurance Practices

MONETARY POLICY COMMITTEE:

• The monetary policy committee is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.
• MPC consists of 6 members. Out of 6, 3 members are from RBI and 3 are appointed by the government.
• Governor of RBI is ex-officio Chairman of the committee.
• The MPC determines the policy interest rate (repo rate) required to achieve the inflation target.
• An RBI-appointed committee led by the then deputy governor Urjit Patel in 2014 recommended the establishment of the monetary policy committee.

INSTRUMENTS OF MONETARY POLICY:

• Repo Rate: The interest rate at which the Reserve Bank lends money to banks against the collateral of government and other approved securities under Liquidity Adjustment Facility (LAF). It is also the benchmark policy rate.
• Reverse Repo Rate: The interest rate at which the Reserve Bank borrows money from banks against the collateral of eligible government securities under LAF
• Liquidity Adjustment Facility (LAF): is a tool by which Reserve Bank adjust money supply in the economy. It is a monetary policy tool which allows the bank to borrow money through repurchase agreements (repo and reverse repos).
• Marginal Standing Facility (MSF): is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage. MSF rate is higher than the Repo rate.
• Bank Rate: This is the long-term rate(Repo rate is for short term) at which central bank (RBI) lends money to other banks or financial institutions. Bank rate is not used by RBI for monetary management.
• Cash Reserve Ratio (CRR): Banks are required to hold a certain proportion of their deposits in the form of cash. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR.
• Statutory Liquidity Ratio (SLR): The share of Net Demand and Time Liabilities that a bank is required to maintain safe and liquid assets, such as government securities, cash, and gold.
• Open Market Operations (OMOs): These include both, purchase and sale of government securities, for injection and absorption of liquidity, respectively by Reserve Bank of India.
• Market Stabilisation Scheme (MSS): Surplus liquidity arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills. The cash so collected is held in a separate government account with the Reserve Bank.

https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=53249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NEWS IN BRIEF: PRELIMS SPECIAL

 

National Single Window System

• Jammu & Kashmir becomes the first union territory to get integrated with the National Single Window System (NSWS).
• Under the NSWS initiative, a number of industrial parks in Jammu & Kashmir will be facilitated for further growth and development.
• Digital platforms will be available for the investors to explore land availability in the union territory to bring more business.
• The Ministry of Commerce and Industry has launched the national single window system for expanding the scope of Ease of Doing Business.
• The Department for Promotion of Industry and Internal Trade in association with Invest India initiated this portal.

https://newsonair.gov.in/News?title=J%26K-govt-launches-Single-Window-Clearance-System-in-Union-Territory&id=435064

 

Atal Tunnel

• Atal tunnel has been officially recognised as the longest highway tunnel above 10,000 feet by the World Book of Records.
• The World Book of Records that offered the recognition to the tunnel, is an organisation that catalogues and verifies records throughout the world in order to authenticate such certifications.
• The Atal tunnel is regarded as an engineering marvel which is anticipated to play a future role in the development of the Lahaul and Spiti region of Himachal Pradesh.

https://newsonair.gov.in/News?title=Atal-Tunnel-certified-by-World-Book-of-Records-as-World%26%2339%3Bs-Longest-Highway-Tunnel&id=435215

 

Scientists develop an energy-efficient method for hydrogen production with less carbon footprint

• Scientists at the International Advanced Research Centre for Powder Metallurgy & New Materials (ARCI) have developed an energy-efficient method for hydrogen production with less carbon footprint.
• Scientists from ARCI have developed a method to produce hydrogen with high purity (99.99%) from a methanol-water mixture at ambient pressure and temperature that uses only one-third of the electrical energy required in water electrolysis.
• Hydrogen is gaining much attention because of its energy value of 40 kWh/kg. It is far ahead if we compare it to chemical fuels like gasoline, diesel, liquid petroleum gas (12-14 kWh/kg).
• In the ECMR process, hydrogen can be produced at a lower temperature (25-60oC) and pressure, unlike chemical reformation. This process uses a polymer electrolyte membrane (PEM).

https://newsonair.com/2022/02/11/scientists-develop-an-energy-efficient-method-for-hydrogen-production-with-less-carbon-footprint/

 

One Ocean Summit

• France has organised the One Ocean Summit in collaboration with the United Nations and the World Bank.
• The high-level session of the summit was virtually attended by the Prime Minister of India. Other heads of state included Germany, the United Kingdom, South Korea, Japan and Canada.
• The Summit intended to encourage the international community to take attentive steps towards protecting and conserving the ocean ecosystem along with the sustainable use of maritime resources.
• The Summit involved discussions to take various initiatives for the conservation of marine ecosystems considering the following intentions:
• Protecting the marine ecosystem
• Sustainable fisheries
• Fight pollution
• Eliminating plastics from entering the marine environment
• Mitigate the impacts of climate change
• Improved governance of oceans
• OceanOPS, a joint centre of the World Meteorological Organisation and the IOC-UNESCO, will launch the Odyssey project that will be endorsed by the United Nations Decade of Ocean Science for Sustainable Development in support of the Global Ocean Observing System.

https://newsonair.com/2022/02/11/pm-modi-to-address-one-ocean-summit-in-france-today-through-video-message/