CHALLENGES FACED BY RBI ABOUT MONETARY POLICY DUE TO COVID-19 

 Due to COVID-19 Pandemic in the nation there is a drastic decline in the Indian economy. This uncertain situation has become a challenging task for a lot of sectors including the banking sector. GDP growth rate is likely to be negative this year. 

 After the amendment of Reserve Bank of India Act, 1934, a 6-member committee was formed through Finance Act, 2016 which was called as Monetary Policy Committee (MPC). The committee aims at maintaining price stability and to facilitate the growth rate of Indian economy. 

RBI is required to ensure that retail inflation which is measured by Consumer Price Index stays at 4%.  Retail inflation can fall between 2% and 6%, this is because of 2% margin which RBI has. 

 In a normal situation when retail inflation rate goes beyond the limit, Monetary Policy Committee shall increase the repo rate. When repo rate is increased, it becomes difficult for banks to borrow money from RBI and in such situations, it becomes necessary for banks to increase their rate of interest and thus borrowing rate from the customers comes down. Thus, it reduces inflation in the country. Similarly, repo rate is reduced when inflation goes below the limit. 

 But in the present situation of ongoing pandemic of COVID-19, where inflation it has been increasing even though the growth is declining. In order to ensure financial stability, it is presumed by State Bank of India (SBI), which happens to be the India’s largest public sector bank, has forecasted that RBI is likely to leave the repo-rate unchanged in the upcoming monetary policy but a senior economist at Kotak Mahindra Bank predict that the repo-rate will be laid down by 25bps (basis points). Although, outside the ambit of the monetary policy, it is very much likely for RBI to issue a one-time restructuring of loans for industries such as tourism, hospitality etc., it simply means that RBI is extending the moratorium period and loan structuring so it can be helpful for the industries which are going in loss due to the pandemic of COVID-19.