Recently ,The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) increased the policy repo rate by 50 basis points (bps) to 5.9% making loans expensive.
- This is RBI MPC’s fourth consecutive rate hike in this financial year.
- The MPC lowered the growth projection of FY23 from 7.2% to 7%.
- It retained the Consumer Price Index (CPI)-based inflation projection at 6.7 per cent for 2022-23
- It is only expected to fall below 6 per cent to 5.8 per cent in the last quarter of FY23.
Rationale behind the decision
- The enduring effects of the pandemic and the geo-political conflict are manifesting in demand-supply mismatches of goods and services.
- Central banks are charting new territory with aggressive rate hikes, even if it entails sacrificing growth in the near-term.
- Therefore ,The MPC was of the view that persistence of high inflation necessitates further calibrated withdrawal of monetary accommodation to restrain broadening of price pressures, anchor inflation expectations and contain the second-round effects.
- This action will support medium-term growth prospects.
- The MPC’s decisions are based on the twin objective, with primacy given to price stability driven by the necessity to keep growth in mind
- The overall indicators and today’s policy action indicates that India is better placed to handle future economic challenges, while the world is on verge of a possible recession
- On the international front, RBI’s assurance to continue its judicious intervention to ensure stability in the foreign exchange market is a welcome sign to curb uncertainties and support long-term revival and resilience of the economy,
- The Indian economy continues to be resilient and there is macroeconomic stability.
- The country has withstood the shocks from COVID-19 and the conflict in Ukraine. Our journey over the last two and half years, our steely resolve in dealing with the various challenges gives us the confidence to deal with the new storm that we are confronted with
- RBI will continue to withdraw its accommodative stance to ensure that inflation remains within the target going forward while supporting growth.
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Monetary Policy Committee (MPC)
- Constituted by RBI under section 45ZB of the Reserve Bank of India (RBI) Act, 1934.
- Chaired by the Governor of RBI.
- Mission: Fixing the benchmark policy interest rate (repo rate) to restrain inflation within the particular target level (2% to 6%).
- MPC conducts meetings at least 4 times a year.
- The monetary policy is published after every meeting with each member explaining his opinions.
Instruments of Monetary Policy
- Repo Rate: The interest rate at which the Reserve Bank provides liquidity under the liquidity adjustment facility (LAF) to all LAF participants against the collateral of government and other approved securities.
- Standing Deposit Facility (SDF) Rate: The rate at which the Reserve Bank accepts non collateralized deposits, on an overnight basis, from all LAF participants. The SDF is also a financial stability tool in addition to its role in liquidity management. The SDF rate is placed at 25 basis points below the policy repo rate. With introduction of SDF in April 2022, the SDF rate replaced the fixed reverse repo rate as the floor of the LAF corridor.
- Marginal Standing Facility (MSF) Rate: The penal rate at which banks can borrow, on an overnight basis, from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2 per cent). This provides a safety valve against unanticipated liquidity shocks to the banking system. The MSF rate is placed at 25 basis points above the policy repo rate.
- Liquidity Adjustment Facility (LAF): The LAF refers to the Reserve Bank’s operations through which it injects/absorbs liquidity into/from the banking system.
- Reverse Repo Rate: The interest rate at which the Reserve Bank absorbs liquidity from banks against the collateral of eligible government securities under the LAF. Following the introduction of SDF, the fixed rate reverse repo operations will be at the discretion of the RBI for purposes specified from time to time.
- Bank Rate: The rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate acts as the penal rate charged on banks for shortfalls in meeting their reserve requirements (cash reserve ratio and statutory liquidity ratio).
- Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a percent of its net demand and time liabilities (NDTL) as on the last Friday of the second preceding fortnight that the Reserve Bank may notify from time to time in the Official Gazette.
- Statutory Liquidity Ratio (SLR): Every bank shall maintain in India assets, the value of which shall not be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank may, by notification in the Official Gazette, specify from time to time and such assets shall be maintained as may be specified in such notification (typically in unencumbered government securities, cash and gold).
- Open Market Operations (OMOs): These include outright purchase/sale of government securities by the Reserve Bank for injection/absorption of durable liquidity in the banking system.