RBI Monetary Policy October 2021 report: 10 Key Takeaways

The Reserve Bank of India’s biannual monetary policy report has projected 7.8 per cent growth for the Indian economy in FY23, provided the monsoon next year is normal, supply chains are restored, India has completed Covid-19 vaccination of its citizens, and there are no exogenous factors.

While announcing the review of the monetary policy on Friday, the RBI’s six-member monetary policy committee retained the growth forecast for FY22 at 9.5%, and lowered its projection for retail inflation projection from 5.7% to 5.3%. Let’s look at the 10 most important takeaways from the RBI report.

1. Economy recovering: India’s economic activity has been normalising since June 2021, with the ebbing of the second Covid-19 wave, relaxation in restrictions, and improvement in the vaccination rate. Urban demand is likely to accelerate with the release of the pent-up demand.

2. Conducive environment for investment: The government’s focus on capital expenditure and reforms push, and large FDI flows, provide a conducive environment for investment activity. There are signs of an increase in investment pipeline in the rest of 2021-22 and the coming year.

3. GDP growth forecast: Professional forecasters survey sees real GDP growth moving from 20.1 per cent in Q1 of 2021- 22 to 5.9 per cent in Q4. It could be 13.1 per cent in Q1 of 2022-23 due to a high base effect, and 6.1 per cent in Q2.

4. Inflation projections: Three-month ahead median inflation expectation for urban households came down by 50 basis points, and one-year projection by 60 basis points, in the September 2021 round of the RBI survey

5. Cost of raw materials and selling prices to rise: Manufacturing firms polled in the July-September 2021 round of industrial outlook survey expect the cost of raw materials and selling prices to increase further in the October-December quarter of 2021-22.

6. Upside and downside risks ahead: Upside risks emanate from persistence of supply chain disruptions, any further hardening of global commodity prices, especially that of crude oil. Downside risks arise from an earlier-than-expected mending of supply chain disruptions, the persistence of weak demand, and a slack in the economy.

7. Liquidity conditions: Money market rates consistently traded below the reverse repo rate, the weighted average call rate – the operating target of monetary policy – on average traded 17 basis points (bps) below the floor of the corridor during the first half of the current financial year

8. Commercial paper issuances: Riding on surplus liquidity, commercial paper issuances increased substantially to Rs 10.1 trillion during the first half of FY22, compared with Rs 7.9 trillion during the same period last year. Commercial paper rates generally traded above the reverse repo rate, with an average spread of 46 basis points.

9. External environment: Crude oil prices turned volatile since the second week of July. The dollar strengthened on the expectation of a US taper. Emerging-market currencies depreciated after peaking in the second week of June, mainly due to retrenchment of capital flows.

10. Impact of high crude oil prices: If crude oil prices are 10% above the baseline, domestic inflation may be 30 basis points higher than the baseline and growth around 20 basis points weaker. For the rupee, a 5% depreciation from the baseline may increase domestic inflation by up to 20 basis points, while GDP growth could get a 15-basis-point boost from increased exports.