Monetary Policy Feb. 2022

Mr. Shaktikanta Das, on February 10th, presented the monetary policy in the meeting held by Monetary Policy Committee (MPC). Monetary policy religiously starts by presenting its repo rates and reverse repo rates. This year was no different with repo rates remaining unchanged for the 10th time in a row at 4% under the Liquidity Adjustment Facility (LAF), a tool that was started under the regime of Narasimha Rao Committee on Banking Sector Reforms 1998 which helped the committee to aid the economy from inflation wounds. In an ideal scenario, lower repo rates encourage businesses to borrow more and hence it promotes liquidity through the market. Reverse repo rates being no different stand at 3.35% with no major changes and Marginal Standing Facility at 4.25%, which is an emergency in which banks borrow from RBI.

The committee has yet continued to stay on accommodative stance as long as necessary to revive and sustain the growth on a durable basis and continue to mitigate the risks from COVID – 19 to the economy and also make sure inflation remains under the belt. The Consumer Price Index (Inflation) is targeted at 4%.

The aggressive spread of the highly transmissible Omicron strain, as well as the consequent restrictions have hampered global economic activity since the MPC’s meeting in December 2021.  The International Monetary Fund (IMF) reduced its global output and trade growth expectations for 2022 downward to 4.4 percent and 6.0 percent, respectively, in its January 2022 update of the World Economic Outlook, from prior forecasts of 4 percent and 6.7 percent.

Globally, commodity prices continued hardening and heightened inflationary pressures after reversing the transitory adjustment that occurred near the end of November. Financial markets have become turbulent as various central banks focus on policy normalisation, including halting asset purchases and raising policy rates earlier than planned. Sovereign bond rates have risen across the board, and stock markets have entered correction territory. In recent weeks, currency markets in emerging market economies (EMEs) have seen two-way movement, owing to substantial capital outflows from stocks and increased concern about the speed and magnitude of US rate rises. The latter resulted in a rise in the volatility of US bond rates.

Bringing our focus to the Indian economy, the National Statistics Office (NSO) released on January 7, 2022, the GDP growth rate at 9.2% for Financial Year 2021-22 surpassing pre-pandemic levels. Apart from private consumption, all factors contributing to GDP exceeded the pre-pandemic levels. Previously, during the same period, numbers were hovering over the negative range.

(Graphical representation of Inflation and GDP in the past years and future projections)

Major points for discussion:

  • Rural demand indicators suggest that there has been a decline for two-wheelers and tractors.
  • Rabi crop has inclined by 1.5% than the previous year.
  • Urban demand indicators have shown a decline in passenger vehicles for November-December
  • Air traffic declined once again which barely had brought its pace back on.
  • There has been an increase in the production of capital goods and a decline on a Year-on-Year basis.
  • Railway freight traffic, e-way bills, and toll collections have indicated growth in December-January.
  • Food consumption items like vegetables, meat and fish, edible oils, and fruits had shown a decline in prices in December.
  • Fuel and Petroleum inflation eased in December however it still stayed well above 2 digits.

By Aryan Manwani

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