RBI steps in to revive economy

Syllabus subtopic: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Prelims and Mains focus: on the steps taken by the MPC and their implications; repo rate; CRR; MPC; CPI

News: The Reserve Bank of India (RBI) stepped in to do the heavy lifting to revive the economy after the Union budget appeared to have few measures to spur credit growth and boost demand.

About the RBI’s move

The central bank introduced a direct incentive framework to boost credit growth, even as the six-member monetary policy committee (MPC) kept benchmark rates unchanged because of uncertainty in the inflation outlook. The repo rate, the rate at which banks borrow from RBI, remained unchanged at 5.15%.

What steps has it taken?

To improve credit flow, RBI temporarily removed the cash reserve ratio (CRR)—which requires banks to set aside 4% of their deposits—for every new retail loan made to finance automobiles, homes, and to small businesses. This move, while making it attractive for banks to lend to retail and small businesses, essentially translates into a short-term cut in cash reserve ratio. This scheme will be available for new loans given till 31 July.

In addition, the central bank will now conduct one- year and three-year term repo auctions to inject up to Rs.1 trillion into the banking system, giving lenders the opportunity to raise money at current rates. When viewed in the context of elevated headline inflationary pressures, this is another incentive for banks to lock medium-term funding at current low rates.

This should encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.

Observations made by the RBI committee on inflation

Given the uncertainty, MPC pegged consumer price inflation for the first half of FY21 at 5-5.4% as compared to 3.8-4% earlier. For the third quarter of FY21, the forecast stands at 3.2% with risks broadly balanced. According to the committee, the recent increase in prices of milk, pulses and crude oil are likely to weigh on inflation.

MPC also noted that the inflation trajectory will be determined by several factors, including the pass-through of telecom charges, increase in prices of drugs and pharmaceuticals and the impact of new emission norms.

MPC projected economic growth for fiscal 2021 at 6%—in the range of 5.5-6% in the first half and 6.2% in the third quarter. This is in line with its past GDP growth projections and that of the Economic Survey, which has pegged growth at 6-6.5%. The committee noted that the economy continues to be weak and the output gap remains negative.

Source: Livemint

Join Our Telegram

India’s tariff policy

India-Central Asia connectivity

Formation Day

03 Dec, 25
SHARE

On 1st November, eight Indian states—Andhra Pradesh, Chhattisgarh, Haryana, Karnataka, Kerala, Madhya Pradesh, Punjab, and Tamil Nadu—along with five Union Territories—Andaman and Nicobar Islands, Chandigarh, Delhi, Lakshadweep, and Puducherry—celebrate their Formation Day. This date marks an important milestone in India

Turtle (Kachhua) Wildlife Sanctuary

02 Dec, 25
SHARE

The Turtle Wildlife Sanctuary, also known as the Kachhua Sanctuary, is located in the Varanasi district of Uttar Pradesh. It is recognised as India’s first freshwater turtle wildlife sanctuary, established to conserve endangered turtle species and support the ecological health of the Ganga River. Location and Extent The sanctuary co

Introduction of AI and Computational Thinking (CT) in

02 Dec, 25
SHARE

The Ministry of Education plans to introduce Artificial Intelligence (AI) and Computational Thinking (CT) from Class 3 onwards in the 2026–27 academic year. This initiative is part of the National Curriculum Framework for School Education (NCF-SE) 2023 and aligns with the National Education Policy (NEP) 2020. The aim is to prepare student

Sal Tree

02 Dec, 25
SHARE

Scientists from the Environment Department of Himachal Pradesh University (HPU) in Shimla have recently revealed that the Sal tree (Shorea robusta) is the most effective natural air purifier for combating rising pollution levels. Their findings highlight the tree’s superior capacity to trap dust, absorb gases, and cleanse the air compared

US Resumes Nuclear Weapon Testing

02 Dec, 25
SHARE

The President of the United States has ordered the resumption of nuclear weapon testing after a gap of 33 years, the last test being in 1992. This decision marks a significant shift in global nuclear policy and has far-reaching implications for geopolitics, the environment, and international security. Status of Global Nuclear Weapon Testing