RBI Monetary Policy to keep inflation levels stable, usher in economic recovery

Supporting business in their recovery and lessening the impact of the pandemic on the economy are the twofold objectives of the RBI Monetary Policy:

October 9, 2020

The current repo rate of 4.0% is to be maintained through the Liquidity Assessment Facility (LAF).

The reverse repo rate is to be maintained at 3.35% in accordance with the movements within the economy.

Supply chain irregularities are expected to lessen over time.

Manufacturing activity across multiple domains and governmental spending currently bolster the economy.

The RBI Monetary Policy, announced on October 9th by Governor Shaktikanta Das, was formulated with the objective of cushioning the impact of COVID-19 on the economy and providing businesses ample support in order to recover. The Committee, on evaluating the status quo of the economy, decided to maintain the current repo rate of  4.0% through the Liquidity Assessment Facility (LAF). Additionally, the reverse repo rate is to be set at 3.35%. This is expected to maintain a 4% consumer price index inflation with a buffer of 2%.  Irregularities in supply chain are expected to be smoothed out and activities including governmental spending and manufacturing in multiple domains are contributing towards bolstering the economy. 

Urban demand can be expected to manifest at a relatively slower pace given the precautionary measures taken by the general population to curb engagement in contact-heavy environments. Incentives are currently being recommended by the Government to help increase consumer demand for commodities during the Diwali-Dussehra festival season, thereby potentially giving a further boost to economic recovery. It is in this regard that the Reserve Bank of India has projected a growth rate of 20.6% for The first quarter of FY 2022. The policy also foresees the strengthening of the rural economy and its contribution towards growth at large. The agriculture sector can be expected to resume its current pace of growth with merchandise exports making gradual but significant recovery. 

The policy cautiously speculates that inflation rates could be maintained at a level of 4.1-4.4% if sudden changes in policy or economic status-quo were to not occur in anticipation of the vaccine. The quantum of liquidity in the current economic scenario has contributed towards the improvement of national finance at large. As the nation and all it’s sectors advance towards economic recovery, strategic and effective policy-making such as the Monetary Policy are pivotal to long-term growth.