Monetary Policy Review of RBI

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    In News 

    • Recently, the Monetary Policy Committee (MPC) of the RBI  based on an assessment of the current macroeconomic situation kept key policy rates, including repo and reverse repo rates unchanged .

    About Monetary Policy Committee (MPC)

    The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB  of the Reserve Bank of India (RBI) Act, 1934.

    • It determines the policy interest rate required to achieve the inflation target.
    • Chaired by the Governor of RBI. 
    • MPC conducts meetings at least 4 times a year. 

    Rationale behind Keeping Policy Rate unchanged

    • The MPC decided by a majority of 5 to 1 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.
    • The RBI is likely to wait for some more time as the economic recovery is uneven and the Omicron variant has dented the sentiment.

    Major Highlights 

    • No change in Repo rate:
      • The central bank has retained the repo rate at 4 per cent to boost growth
        • This means banks won’t hike lending and deposit rates and EMIs on loans will remain unchanged.
    • Reverse repo rate unchanged:
    • The RBI has retained the reverse repo rate at 3.35 per cent
    • Marginal Standing Facility (MSF): 
    • It also retained the marginal standing facility (MSF) rate and kept the Bank Rate unchanged at 4.25 per cent.
    • Inflation to moderate:
      • The RBI has projected a 5.3 per cent consumer price (retail) inflation 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.
      • Inflation is likely to moderate in the first half of 2022-23 and move closer to the target rate, thereafter providing room to remain accommodative.
        • Timely and opposite supply-side measures from the government have substantially helped contain inflationary pressures.
    • Growth forecast:
      • The central bank has projected the real GDP growth at 7.8 percent 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.

    Risk Highlighted 

    • The MPC flagged the potential downside risks to economic activity from the highly contagious Omicron variant. 
      • Reassuringly, the symptoms have remained relatively mild and the pace of infections is moderating as quickly as it surged.
    • There is, however, some loss of momentum in economic activity as reflected in high-frequency indicators such as purchasing managers’ indices for both manufacturing and services, finished steel consumption and sales of tractors, two-wheelers and passenger vehicles.

    Way Ahead 

    • RBI will continue to focus on smooth completion of the government borrowing programme, market participants also have a stake in the orderly evolution of financial conditions and the yield curve.
    • It is expected that market participants will engage responsibly and contribute to cooperative outcomes that benefit all.
    • The RBI is likely to follow a gentle approach to the normalization and ultimately withdrawal of monetary support unlike Western central banks that have switched to a hyper-aggressive mode.

    Key Terminologies 

    • Repo Rate: It is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. 
      • Repo stands for ‘repurchase option’ or ‘repurchase agreement’.
      • The central bank provides these short term loans against securities such as treasury bills or government bonds.
      • It is commonly known as Policy Rate too.
      • Repo rate is used by monetary authorities to control inflation.
      • The government increases the repo rate when they need to control prices and restrict borrowings. 
      • On the other hand, the repo rate is decreased when there is a need to infuse more money into the market and support economic growth.
    • Reverse Repo Rate: This is the rate the central bank of a country pays its commercial banks to park their excess funds in the central bank.
      • The reverse repo rate provided by RBI is generally lower than the repo rate.
      • While repo rate is used to regulate liquidity in the economy, reverse repo rate is used to control cash flow in the market. 
      • When there is inflation in the economy, RBI increases the reverse repo rate.
        • It encourages commercial banks to make deposits in the central bank and earn returns.
    • Marginal Standing Facility: MSF or marginal standing facility is a system of the Reserve Bank of India that allows scheduled commercial banks to avail funds overnight.
      • It was introduced by the RBI as a provision for banks to avail overnight funds during a revision of the country’s monetary policy in 2011-12.
      • It is usually higher than the repo rate.
      • Banks can use their SLR or statutory liquidity ratio to take loans under MSF. 
        • This is a short-term loan used to maintain the liquidity of banks.
    • Consumer Price Index (CPI) Inflation: 
      • It measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.
      • It also represents retail inflation.
      • In India, five types of CPI are published.

    CPI Type

    Published by

    Remark

    CPI-Urban 

    National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.

    Measures Urban Retail Inflation.

    Combined with CPI Rural to produce Overall CPI.

    CPI Rural

    National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.

    Measures Rural Retail Inflation.

    CPI for Industrial Workers (IW)

    Labour Bureau in the Ministry of Labour and Employment

    Used for determining dearness allowance (DA), fixation and revision of minimum wages in scheduled employments.

    CPI for Agricultural Labourer (AL)

    Labour Bureau in the Ministry of Labour and Employment

    Used to fix minimum wages of agricultural labourers.

    CPI for Rural Labourer (RL)

    Labour Bureau in the Ministry of Labour and Employment

    Used to fix minimum wages of rural unskilled employees

    Source:IE