Context:
The recent Monetary Policy Committee meeting of the RBI Friday kept the repo rate unchanged for the seventh consecutive time at 6.5 per cent.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- Recent Monetary Policy and RBI Decisions
- Instruments of Monetary Policy
- About Monetary Policy Committee (MPC)
Key Highlights of the MPC Meeting
Repo Rate Status
- The repo rate remains unchanged at 6.5%.
- The repo rate signifies the interest rate at which commercial banks borrow money from the Reserve Bank of India (RBI).
Policy Stance Retention
- The RBI maintains its policy stance as the “withdrawal of accommodation,” despite recent liquidity deficits.
- “Withdrawal of accommodation” implies reducing the money supply to manage inflation.
GDP Growth and Inflation Forecast
- GDP growth projection for fiscal 2024-25 is maintained at 7%.
- Retail inflation is projected at 4.5% for the same period.
- February’s CPI inflation was recorded at 5.09%, slightly lower than January’s 5.1%.
- Food inflation continues to be volatile, hindering the disinflation process.
Investment Activity Outlook
- Prospects for investment activity appear promising due to:
- A rising private capex cycle.
- Consistent and robust government capital expenditure.
- Healthy financial positions of banks and corporates.
- Increasing capacity utilization.
- However, geopolitical tensions and trade route disruptions present potential risks.
Rupee Performance
- The rupee exhibited stability against currencies from both emerging markets and certain advanced economies throughout 2023-24.
- This stability indicates India’s economy is robust, financially sound, and has strengthened its position in the global market.
Instruments of Monetary Policy
There are several direct and indirect instruments that are used for implementing monetary policy.
- Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
- Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
- Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
- Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
- Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
- Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
- Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
- Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
- Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
- Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.
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.
-Source: Indian Express
