MPC: Status Quo On Rates And Accommodative Stance Maintained
By A Special Correspondent
First publised on 2021-10-09 06:56:07
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The Monetary Policy Committee (MPC) of the RBI has maintained status quo on interest rates and will continue with its accommodative stance. The repo rate at 4 percent and the reverse repo rate at 3.35 percent were left untouched as the MPC felt that with the economy showing signs of returning to normal after the disruption caused by the pandemic, it needed continued support in the form of money for investment at reasonable rates. However, the RBI was of the view that with the liquidity overhang of nearly Rs 13 lakh crore in the system, it was now times to mop up the excess liquidity, but in a gradual and calibrated manner. Hence, it has decided to stop G-SAP for now but has said that it was ready to start it again if needed. The other measures announced were increasing the limit of IMPS transaction from Rs 2 lakh to Rs 5 lakh to facilitate easy e-payments and geo tagging for payment system touch points.
The apex bank said that the liquidity in the system was at an average of Rs 7 lakh per day from June to August this year. But in September, it rose to Rs 9 lakh crore per day and has further risen to Rs 9.5 lakh crore per day in October, leading to a liquidity overhang of nearly Rs 13 lakh crore. Since it could lead to inflationary pressures, the bank has decided to mop up the excess liquidity through liquidity adjustment facility. The immediate effect of these announcements was a stiffening of bond yields which rose by 5 basis points. The apex bank also said that the rise in fuel prices needs to be checked by lowering taxes and not through monetary policy.
The accommodative stance - which means that the apex bank is willing to continue with the same rates or even lower them if need be - is the best way to support the economy now. So is the decision to mop up a part of the excess liquidity and the willingness to resume G-SAP if needed. The need now is to reorient the lending policy of PSU banks so that it is not ultraconservative and businesses get funds to start new projects or expand existing ones.
