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Why Has RBI Opted for Status Quo Again?


Signalling that the country is not yet ready for a monetary tightening or a hike in interest rates, the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept key policy rates – Repo rate, Reverse repo rate and the Bank rate – unchanged for the 10th time in a row, and retained the accommodative policy stance.


GS III- Indian Economy (Monetary Policy)

Dimensions of the Article:
  1. Repo rate
  2. Reverse repo rate
  3. Accommodative policy stance to continue
  4. Inflation to moderate
  5. Growth forecast
  6. About Monetary Policy Committee (MPC)

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.

Accommodative policy stance to continue

  • The policy panel, by a 5 to 1 majority, 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”.
  • While the current stance of ‘accommodative policy for as long as necessary to revive growth’ was up for a review, analysts said the RBI is likely to wait for some more time as the economic recovery is uneven and the Omicron variant has dented the sentiment.

Inflation to moderate

Consumer price (retail) inflation:
  • The RBI has projected a 5.3 per cent for the current financial year 2021-22 (FY22) despite rising crude oil prices.
  • Retail inflation for the next fiscal (FY23) is projected at 4.5 per cent, below the earlier projections.

Growth forecast

  • The central bank has projected the real GDP growth at 7.8 per cent for the next financial year (2022-23) while real GDP growth at 9.2 per cent for 2021-22 takes it modestly above the level of GDP in 2019-20.
  • With the Covid pandemic impacting recovery, analysts were expecting a slight downward revision in the GDP growth rate for FY22.
  • Even as the economy has shown a revival, the first advanced estimate of GDP for the current fiscal shows that it has barely reached the pre-pandemic level.
  • In some contact-intensive sectors, the revival has been slow and is yet to reach the 2019-20 level.
  • These are the sectors that are employment-intensive, and two years of the continuous drag has created a huge burden of unemployment.
  • Virtually all the growth engines, except public investment and exports, have been stuttering; both private consumption and investment are yet to revive, Brickwork Ratings said.

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: The Hindu

March 2024