RBI’s Monetary Policy announcements

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    The Reserve Bank of India (RBI) made an announcement regarding its key rates after the conclusion of a three-day Monetary Policy Committee (MPC) meeting.

    Major Highlights 

    • The committee decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50% on the basis of an assessment of the current and evolving macroeconomic situation
    • The standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.
      • This is the second time that the policy rate has been paused after a 250 basis point conservative rate hike to curb inflation.
    •  Headline inflation is above the target of 4 percent and is expected to remain so during the rest of the year.
      •  However, the central bank lowered the retail inflation projection for FY24 to 5.1 percent, from 5.2 percent.
    • GDP growth projection retained at 6.5 percent for FY24
    • The current account deficit (CAD) is expected to have moderated further in Q4:2022-23 and remain eminently manageable in FY24.
    • RBI permits non-bank PPI issuers to issue e-RUPI vouchers.
    • Banks to issue RuPay Prepaid Forex cards.

    Key Terms

    • Headline inflation: Headline inflation refers to the change in the value of all goods in the basket.
      • Headline inflation is more relevant for developing economies than for developed economies.
    • Core inflation: Core inflation is arrived at by removing the inflation in food and fuel from headline inflation. By removing food and fuel inflation (since these prices fluctuate more wildly), core inflation provides a more robust measure of inflation in the economy.
      • Core inflation is less volatile than headline inflation.
    • Retail inflation: Retail inflation is the inflation (or rise in the general price level) that everyday consumers face.

    Rationale 

    • The MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.
    • These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth. 

    Implications 

    • Fundamentals for the domestic economy are improving and the Indian economy stands out as strong and resilient.
    • Lending and deposit rates are likely to remain unchanged
    • Equated monthly installments (EMIs) of home, vehicle and other borrowers will remain steady for the time being
    • Banks will also not increase fixed deposit rates. The decision to hold deposit rates at the current levels will be driven by surplus liquidity in the banking system due to improvement in low-cost current account and savings account (CASA) balance following the deposit of Rs 2000 banknotes.
    • The decision will provide much-needed stability to the financial ecosystem, allowing businesses to plan and execute strategies effectively. 
    • It sets the stage for a conducive environment for businesses to thrive, invest, and contribute to India’s economic growth.

    Has India’s economy reached a Goldilocks moment?

    • The reference to Goldilocks moment comes from the children’s tale about a girl Goldilocks who went inside the house of a family of three bears and chose the bowl of porridge which was just the perfect temperature — neither too hot, nor too cold.
    •  A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth).

    Issues and Challenges

    • Even though inflation expectations are moderating they are still fairly high.
    • There are many headwinds or factors capable of pushing against the economy.
      • These include weak demand for our goods from the rest of the world (ROW) because the ROW is struggling to grow by itself, the volatility in global financial markets, continuing geopolitical tensions, and lastly the possible impact of El Nino (which can upset the normal monsoon).

    Conclusion and Way Ahead 

    •  The MPC will continue to remain vigilant on the evolving inflation and growth outlook.
    •  It will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and bring down inflation to the target
    • “Going forward, the Reserve Bank will remain nimble in its liquidity management, while ensuring that adequate resources are available for the productive requirements of the economy

    About the Monetary policy committee (MPC)

    • Section 45ZB of the amended RBI Act, 1934 provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government by notification in the Official Gazette. 
      • The first such MPC was constituted on September 29, 2016.
      • Governor of the Reserve Bank of India—Chairperson, ex officio;

    Source: TH

    Mains Practise Question 

    [Q]  Elaborate the steps taken by the Reserve Bank of India to ensure that inflation progressively aligns with the target while supporting growth.