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High Inflation – ‘A Major Concern’

Context:

Reserve Bank of India (RBI) Governor Shaktikanta Das has said as “high inflation continues to be the major concern.

Relevance:

GS-III Indian Economy

Dimensions of the Article:

  1. Key Points
  2. About Monetary Policy Committee (MPC)
  3. Repo rate
  4. Reverse Repo rate

Key Points:

  • The Governor of RBI said that “high inflation continues to be the major concern”.
  • RBI is set to go for a further increase in the policy rate to effectively deal with inflation and inflation expectations as per the recommendations of Monetary Policy Committee (MPC).
  • The MPC, which hiked the policy repo rate by 50 basis points (bps) to tame inflation in its meeting, has committed to bring down the inflation to the RBI’s tolerance level.
  • The Russia-Ukraine war has globalised inflationary pressures across geographies, and there are increasing risks of long-term inflation expectations getting unanchored.

About Monetary Policy Committee (MPC):

The Monetary Policy Committee (MPC) is the body of the RBI, headed by the Governor, responsible for taking the important monetary policy decisions about setting the repo rate.

  • Repo rate is ‘the policy instrument’ in monetary policy that helps to realize the set inflation target by the RBI (at present 4%).

Membership of the MPC:

The Monetary Policy Committee (MPC) is formed under the RBI with six members.

  • Three of the members are from the RBI while the other three members are appointed by the government.
  • Members from the RBI are the Governor who is the chairman of the MPC, a Deputy Governor and one officer of the RBI.
  • The government members are appointed by the Centre on the recommendations of a search-cum-selection committee which is to be headed by the Cabinet Secretary.

Objectives of the MPC:

Monetary Policy was implemented with an initiative to provide reasonable price stability, high employment, and a faster economic growth rate.

The major four objectives of the Monetary Policy are mentioned below:

  • To stabilize the business cycle.
  • To provide reasonable price stability.
  • To provide faster economic growth.
  • Exchange Rate Stability.

Repo rate:

The central bank has retained the repo rate – the rate at which the RBI lends funds to banks – at 4 per cent to boost growth.

  • This means banks won’t hike lending and deposit rates and EMIs on loans will remain unchanged.
    • The RBI has reduced key policy repo rate by 115 bps to 4.0 per cent and reverse repo rates by 155 bps to 3.35 per cent since February 2020.
  • Banks had since then reduced their interest rates (both deposits and lending) significantly.
  • The large size of the FY23 market borrowings, and with no progress on the inclusion of Indian debt market in the global bond indices, might have prompted the RBI to delay the liquidity normalisation in an effort to keep the cost of large borrowings programme under control, said an analyst.
  • It also retained the marginal standing facility (MSF) rate, and kept the Bank Rate unchanged at 4.25 per cent.

Reverse repo rate:

Contrary to expectations of a hike, the RBI has retained the reverse repo rate – the rate at which the RBI borrows money from banks – at 3.35 per cent.

  • Bond yields had spiked after the government announced higher market borrowing of Rs 14.95 lakh crore in the next fiscal.

-Source: Indian Express

 


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