The meeting of the RBI (MPC) finance committee came at a critical time with the economy facing the second wave of coronavirus. In anticipation of the expected move, the MPC maintained the current status quo in policy values and decided to continue standing.
The second wave has hit the economy as most countries impose locks and other restrictions. For this reason, although the issue of inflation and the need for general monetary policy is tightening, Governor Shaktanta Das has assured that the RBI will continue in a stable position as long as there is a need to revitalize and maintain growth.
Growth, inflation outlook
With the start of the second wave, various rating agencies have reduced India’s GDP growth rate. The RBI also revised its growth rate to 9.5 percent in FY22, which looks reliable as economic activity in the first quarter was severely affected.
As indicated by Das, the city’s demand for moderation in April-May, has been taken up by various indicators of high frequency.
Consumption is the backbone of India’s economy, accounting for more than 50 percent of India’s GDP. Therefore, with the demand left behind, it could lower GDP as a whole. In FY21, where consumer spending was given 9.14 percent, GDP registered 7.25 percent.
The Governor also warned of high prices and goods that could put pressure on inflation. Disruption of the supply side due to locking restrictions can be spoilsport as well. However, the RBI kept the inflation rate at 5.1% of FY22.
G-SAP, support for national governments
The RBI has announced a government security program (G-SAP) 2.0 for Q2FY22 at Rs 1.2 lakh crore. It demonstrates the RBI’s commitment to maintaining a collateral yield, which can support government and corporate lending. In addition, state development loans (SDLs) are included in G-SAP.
The COVID-19 epidemic has worsened the state of the country’s finances as revenue collection has been weak. In this case, the inclusion of SDL in G-SAP will support market lending to national governments.
Liquid support measures
To support the financial needs of MSMEs, a special payment center for 16,000 crore has been extended to the Indian Small Industrial Development Bank (SIDBI).
Similarly, the RBI has announced a tap acquisition window for Rs 15,000 in highly connected sectors. Under this scheme, banks can provide new loan support in these sectors and as an incentive, banks will be allowed to park the remaining amount up to the size of the loan amount created under this program through the reverse repo window. However, fears of rising NPAs and the state of bankruptcy risk can be a barrier. For example, the growth of bank loans in March 2021 was reduced to 5.6% of YoY.
Das also touched on financial market instability due to revenue. The RBI has played a significant role in the forex market to ensure stability. With the development of the global economy, more such actions will be required from the RBI in the coming days.
In his speech, the governor made clear the RBI’s commitment to restoring the economy to growth and reiterated that the MPC would follow a government-led approach rather than a timely one.
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