Context: Recently, The Reserve Bank of India (RBI) has released its Monetary Policy Report (MPR).The report follows the unscheduled monetary policy meeting held in end March, 2020 to discuss the uncertainties arising from the nationwide lockdown.Since the review was conducted in end March, 2020, the early policy review, scheduled for April,2020 was withdrawn.
Key Findings of the Report

• The consumer price index (CPI)-based inflation, had stayed elevated in the last few months. It is expected to decrease during the course of the financial year.
• CPI inflation is tentatively projected to ease from 4.8% in (Quarter)Q1 of 2020-21 to 4.4% in Q2, 2.7% in Q3 and 2.4% in Q4.
• This may be due to the prevailing high uncertainty.
• Aggregate demand may weaken further than currently anticipated and ease core inflation further.
• Supply bottlenecks could increase pressures more than expected.
• Estimates indicate that inflation could move in a range of 3.6-3.8% assuming a normal monsoon and no major exogenous or policy shocks.
• Earlier the Repo Rate was reduce by 75 basis points (bps) to 4.4% and the Cash Reserve Ratio was reduced by 100 bps to 3%.
• However, the RBI refrained from making any prediction on growth. Forecasts for real Gross Domestic Product (GDP) growth in India were not provided due to prevailing uncertainties due to Covid-19.
• Improvements in inflation and growth are expected to emanate from monetary, fiscal and other policy measures and the early containment of Covid-19. However, there are uncertainties with these factors.

Issue of Oil Price Drop

• The sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade.
• However, the gain from this channel is not expected to offset the impact of shutdown and loss of external demand.

Exchange Rates

• The global financial market volatility caused by the uncertainty of macroeconomic impact of the Covid-19, as in February-March 2020, could exert pressure on the Indian rupee.
• Should the rupee depreciate by 5% from the baseline, inflation could increase by around 20 bps while GDP growth could be higher by about 15 bps through increased net exports.
• In contrast, should Covid-19 normalise quickly, strong capital flows could revive is still under trial.
• An appreciation of the rupee by 5% could moderate inflation by around 20 bps and GDP growth by around 15 bps vis-a-vis the baseline.

About Monetary Policy

• Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
• In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
• The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and through many other instruments.
• Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy. Monetary policy can be expansionary and contractionary in nature. Increasing money supply and reducing interest rates indicate an expansionary policy. The reverse of this is a contractionary monetary policy.
• For instance, liquidity is important for an economy to spur growth. To maintain liquidity, the RBI is dependent on the monetary policy. By purchasing bonds through open market operations, the RBI introduces money in the system and reduces the interest rate.