Monetary Policy Rates

Why in news?

In the recently held MPC meeting, RBI has decided to keep the policy rates unchanged for the third time in a row.

Why has MPC opted for status quo on rates?

It is of the view that inflation is likely to remain high excepting in winter months.
Moreover efforts are required to break the inflation spiral being fuelled from supply chain disruptions, indirect taxes & to mitigate supply-side driven inflation pressures.
So it avoided in using its space available to act in support of growth.

What are the prospects on the inflation?

The outlook for inflation is unfavourable as a significant margin is present between wholesale and retail inflation & supply-side bottlenecks will affect consumers.

The RBI has projected CPI inflation at 6.8 % for the Q3 of 2020-21, 5.8 % for Q4 of 2020-21 and 5.2 % to 4.6 % in the first half of 2021-22, with risks broadly balanced.
Although cereal and vegetable prices may ease, other food prices are likely to persist at elevated levels.
With the continuation of OPEC-plus production cuts, crude oil prices are likely to remain volatile in the near-term.

Is the recovery picking up momentum?

The panel said recovery in rural demand is expected to strengthen further & urban demand will also gain momentum as unlocking spurs activity and employment.
However, this can be affected by rise in infections in some parts of the country leading to local containment measures.
GDP is expected to expand by 21.9 per cent to 6.5 per cent in the first half of 2021-22.
Exports are on an uneven recovery but will progress with arrival of vaccine.
Demand for contact-intensive services is likely to remain subdued for some time due to social distancing norms and risk aversion.
On the whole, consumers remain optimistic about the outlook, business sentiment of manufacturing firms is gradually improving, & fiscal stimulus supports growth-generating investment.

What is the RBI’s forward action plan?

Source: The Indian Express, Business Line