�ेस �काशनी PRESS RELEASE

भारतीय �रज़व� ब� क
RESERVE BANK OF INDIA

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December 08, 2021

Monetary Policy Statement, 2021-22

Resolution of the Monetary Policy Committee (MPC)
December 6-8, 2021

On the basis of an assessment of the current and evolving macroeconomic

situation, the Monetary Policy Committee (MPC) at its meeting today (December 8,
2021) decided to:

• keep the policy repo rate under the liquidity adjustment facility (LAF)
unchanged at 4.0 per cent.

The reverse repo rate under the LAF remains unchanged at 3.35 per cent and the
marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.

• The MPC also decided to continue with the accommodative stance as

long as necessary to revive and sustain growth on a durable basis and
continue to mitigate the impact of COVID-19 on the economy, while
ensuring that inflation remains within the target going forward.

These decisions are in consonance with the objective of achieving the medium-
term target for consumer price index (CPI) inflation of 4 per cent within a band of
+/- 2 per cent, while supporting growth.

The main considerations underlying the decision are set out in the statement below.

Assessment
Global Economy
2. Since the MPC’s meeting during October 6-8, 2021, surges of infections
across geographies, emergence of the Omicron variant, the persistence of supply
chain disruptions and elevated energy and commodity prices continue to weigh on
global economic activity. Global merchandise trade is slowing after a sharp rebound
from the pandemic due to the disruptions in port services and turnaround time,
elevated freight rates and the global shortage of semiconductor chips, which could
dampen future manufacturing output and trade. The composite global purchasing
managers’ index (PMI), however, improved to a four-month high in November, with
services continuing to perform better than manufacturing for eight consecutive
months.
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3. Commodity prices remain elevated across the board, though there has been
some softening since late October and further drop towards end-November following
uncertainties from the new COVID-19 variant, among others. Headline inflation in
several advanced economies (AEs) and emerging market economies (EMEs) has
soared, prompting a number of central banks to continue tightening and others to
bring forward policy normalisation. With the US Federal Reserve commencing
tapering of its monthly asset purchases and the possibility of faster taper, renewed
bouts of volatility and heightened uncertainties have unsettled global financial
markets. Bond yields which had risen in most countries, responding to inflation and
monetary policy actions, eased from the last week of November. The US dollar has
been trading higher in recent weeks against both AE and EME currencies.

Domestic Economy

4. On the domestic front, data released by the National Statistical Office (NSO)
on November 30, 2021 showed that real gross domestic product (GDP) expanded by
8.4 per cent year-on-year (y-o-y) in Q2:2021-22, following a growth of 20.1 per cent
during Q1:2021-22. With the recovery gaining momentum, all constituents of
aggregate demand entered the expansion zone, with exports and imports markedly
exceeding their pre-COVID-19 levels. On the supply side, real gross value added
(GVA) increased by 8.5 per cent y-o-y during Q2:2021-22.

5. Available data for Q3:2021-22 indicate that the momentum of economic

activity is gaining further traction, aided by expanding vaccination coverage, the rapid
subsiding of new infections and release of pent-up demand. Rural demand exhibited
resilience – tractor sales improved in October over the same month of 2019 (pre-
pandemic level), while motorcycle sales are slowly inching towards their pre-
pandemic levels. Continued direct transfers under PM Kisan scheme are supporting
rural demand. The demand for work under the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA) moderated in November from a year ago,
suggesting a pickup in farm labour demand. Supported by favourable soil moisture
content and good reservoir storage levels, rabi sowing was 6.1 per cent higher than a
year ago as on December 3, 2021.

6. Urban demand and contact-intensive services activities are rebounding on

improving consumer optimism, supported by festival demand. High-frequency
indicators such as electricity demand, railway freight traffic, port cargo, toll
collections, and petroleum consumption registered robust growth in
October/November over the corresponding months of 2019. Automobile sales, steel
consumption and air passenger traffic still remained below 2019 levels even though
they gained momentum in October as supply side shortages eased. Investment
activity is exhibiting modest signs of improvement – production of capital goods
remained above pre-pandemic levels for the third month in a row during September,
while import of capital goods in October rose at double-digit pace over its level two
years ago. Prints of manufacturing and services PMIs for November 2021 suggested
continued improvement in economic activity. Exports grew in November for the ninth
month in a row, along with a surge in non-oil non-gold imports on the back of reviving
domestic demand.
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7. Headline CPI inflation, which has been on a downward trajectory since June
2021, edged up to 4.5 per cent in October from 4.3 per cent in September on account
of a spike in vegetable prices – due to crop damage from heavy rainfalls in October in
several states, and fuel inflation – driven up by international prices of liquefied
petroleum gas and kerosene. In fact, fuel inflation at 14.3 per cent in October surged
to an all-time high. Core inflation or CPI inflation excluding food and fuel remained
elevated at 5.9 per cent during September-October with continuing upside pressures
stemming from clothing and footwear, health, and transportation and communication
sub-groups.

8. Liquidity conditions remained in large surplus, with daily absorptions through

the fixed rate reverse repo and the variable rate reverse repo (VRRR) operations
under the liquidity adjustment facility (LAF) averaging ₹8.6 lakh crore in October-
November. Reserve money (adjusted for the first-round impact of the change in the
cash reserve ratio) expanded by 7.9 per cent (y-o-y) on December 3, 2021. Money
supply (M3) and bank credit by commercial banks grew y-o-y by 9.5 per cent and
7.0 per cent respectively, as on November 19, 2021. India’s foreign exchange
reserves increased by US$ 58.9 billion in 2021-22 (up to December 3, 2021) to
US$ 635.9 billion.

Outlook

9. The inflation trajectory, going forward, will be conditioned by a number of

factors. The flare-up in vegetables prices due to heavy rains in October and
November is likely to reverse with the winter arrivals. Rabi sowing is progressing well
and is set to exceed last year’s acreage. Recent pro-active supply side interventions
by the Government continue to restrain the pass-through of elevated international
edible oil prices to domestic retail inflation. Crude prices have seen a significant
correction in recent period. Cost-push pressures from high industrial raw material
prices, transportation costs, and global logistics and supply chain bottlenecks
continue to impinge on core inflation. The slack in the economy is muting the pass-
through of rising input costs to output prices. Taking into consideration all these
factors, CPI inflation is projected at 5.3 per cent for 2021-22; 5.1 per cent in Q3;
5.7 per cent in Q4:2021-22, with risks broadly balanced. CPI inflation for Q1:2022-23
is projected at 5.0 per cent and for Q2 at 5.0 per cent (Chart 1).

10. The recovery in domestic economic activity is turning increasingly broad-

based, with the expanding vaccination coverage, slump in fresh COVID-19 cases and
rapid normalisation of mobility. Rural demand is expected to remain resilient. The
spurt in contact-intensive activities and pent-up demand will continue to bolster urban
demand. The government’s infrastructure push, the widening of the performance-
linked incentive scheme, structural reforms, recovering capacity utilisation and benign
liquidity and financial conditions provide conducive conditions for private investment
demand. The Reserve Bank’s surveys point to improving business outlook and
consumer confidence. On the other hand, volatile commodity prices, persisting global
supply disruptions, new mutations of the virus and financial market volatility pose
downside risks to the outlook. Taking all these factors into consideration and
assuming no resurgence in COVID-19 infections in India, the projection for real GDP
growth is retained at 9.5 per cent in 2021-22 consisting of 6.6 per cent in Q3; and 6.0
per cent in Q4:2021-22. Real GDP growth is projected at 17.2 per cent for Q1:2022-
23 and at 7.8 per cent for Q2 (Chart 2).
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11. The impact of the recent spike in vegetables prices on food inflation prints is
expected to dissipate as the usual softening of prices in the winter sets in. The partial
roll back of Central excise and State Value Added Taxes (VAT) on petrol and diesel
in November have eased retail selling prices and will have second round effects over
a period of time. Crude oil has seen some correction but remains volatile. Core
inflation will need to be closely monitored and held in check. For a sustained
lowering of core inflation, continuing the normalisation of excise duties and VATs
alongside measures to address other input cost pressures assume critical
importance, more so as demand improves. The domestic recovery is gaining traction,
but activity is just about catching up with pre-pandemic levels and will have to be
assiduously nurtured by conducive policy settings till it takes root and becomes self-
sustaining. In particular, private investment has to lead the revival of the economy,
along with the strong impetus being provided by exports. Private consumption,
despite strong recovery in Q2:2021-22, remains below its pre-pandemic level and
demand for contact-intensive services could potentially face headwinds if authorities
take pre-emptive steps to contain the fallout of Omicron. Downside risks remain
significant rendering the outlook highly uncertain, especially on account of global
spillovers, the potential resurgence in COVID-19 infections with new mutations,
persisting shortages and bottlenecks and the widening divergences in policy actions
and stances across the world as inflationary pressures persist. A tightening of global
financial conditions poses risks to global economic activity and to India’s prospects
as well. Against this backdrop, the MPC has judged that the ongoing domestic
recovery needs sustained policy support to make it more broad-based. Considering it
appropriate to wait for growth signals to become solidly entrenched while remaining
watchful on inflation dynamics, the MPC decided to keep the policy repo rate
unchanged at 4 per cent and to continue with an accommodative stance as long as
necessary to revive and sustain growth on a durable basis and continue to mitigate
the impact of COVID-19 on the economy, while ensuring that inflation remains within
the target going forward.
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12. All members of the MPC – Dr. Shashanka Bhide, Dr. Ashima Goyal,
Prof. Jayanth R. Varma, Dr. Mridul K. Saggar, Dr. Michael Debabrata Patra and
Shri Shaktikanta Das – unanimously voted to keep the policy repo rate unchanged at
4.0 per cent.

13. All members, namely, Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Mridul K.
Saggar, Dr. Michael Debabrata Patra and Shri Shaktikanta Das, except Prof. Jayanth
R. Varma, voted to continue with the accommodative stance as long as necessary to
revive and sustain growth on a durable basis and continue to mitigate the impact of
COVID-19 on the economy, while ensuring that inflation remains within the target
going forward. Prof. Jayanth R. Varma expressed reservations on this part of the
resolution.

14. The minutes of the MPC’s meeting will be published on December 22, 2021.

15. The next meeting of the MPC is scheduled during February 7-9, 2022.

(Yogesh Dayal)
Press Release: 2021-2022/1322 Chief General Manager