RBI’s Decision in the Recent MPC Meeting: Keeping Repo Rate Unchanged

Context:

Recently, Reserve Bank of India (RBI) in its bimonthly Monetary Policy Committee (MPC) Meeting has retained benchmark interest rates unchanged for the 4th time in a row. The MPC kept the policy Repo Rate Unchanged at 6.50%.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. Key Takeaways from the MPC Meeting
2. Reasons for Maintaining Unchanged Benchmark Rates
3. Concerns Flagged by the RBI in its MPC Meeting
4. Monetary Policy Instruments at RBI’s Disposal

Key Takeaways from the MPC Meeting

In the most recent MPC (Monetary Policy Committee) meeting, several crucial decisions and insights emerged:

Repo Rate Held Steady: The RBI unanimously decided to maintain the policy repo rate at 6.5% as a measure to balance economic growth and inflation control.

• GDP and Inflation Forecasts: The RBI retained its real GDP growth forecast for 2023-24 at 6.5% and the average CPI inflation forecast for FY24 at 5.4%. However, the MPC raised its headline inflation projection for the second quarter to 6.4%.
• Inflation Target Commitment: The RBI Governor emphasized a commitment to the 4% inflation target and underlined the importance of readiness to take timely actions to prevent food and fuel price shocks from affecting underlying inflation trends.
• Liquidity Management: The RBI will actively manage liquidity in line with the monetary policy stance and may conduct Open Market Operations (OMO) sales as needed.
• Enhanced Gold Loan Limits: The RBI announced the doubling of lending limits for Gold Loans under the Bullet Repayment Scheme (BRS) for urban cooperative banks to Rs 4 lakh, benefiting banks that have met their Priority Sector Lending (PSL) targets.
• Stance on Accommodation: The RBI reiterated its stance of ‘withdrawal of accommodation,’ indicating a cautious approach as long as risks to inflation persist. This means reducing the money supply to counter further inflation.

Reasons for Maintaining Unchanged Benchmark Rates

The decision to keep benchmark rates unchanged was motivated by several key factors:

• Economic Resilience: Despite facing various uncertainties and challenges, the Indian economy has demonstrated resilience. This confidence in the economy’s ability to withstand potential shocks contributed to the decision.
• Cumulative Impact of Previous Rate Hikes: The MPC recognized the cumulative effect of prior policy repo rate increases, amounting to 250 basis points. Given the time required for these rate hikes to take full effect in the economy, the committee chose to maintain the rates in the current meeting.
• Commitment to Inflation Target: The MPC remains dedicated to aligning inflation with the 4% target on a sustainable basis. The existing policy stance is considered essential to achieve this objective without an immediate rate adjustment.
• Concerns about Food Price Shocks: The committee expressed concerns about the possible resurgence of food price shocks affecting headline inflation. Keeping rates unchanged may serve as a precautionary measure to closely monitor the situation and be prepared to respond promptly if inflationary pressures intensify.

Concerns Flagged by the RBI in its MPC Meeting

The RBI raised several concerns during its MPC meeting:

• High Inflation as a Major Risk: The RBI considers high inflation a significant risk to both macroeconomic stability and sustainable growth. Despite a decrease in core inflation (excluding food and fuel components), uncertainties persist in the overall inflation outlook. Factors such as reduced kharif sowing for essential crops, low reservoir levels, and fluctuations in global food and energy prices contribute to this uncertainty.
• External Headwinds: The RBI highlighted various external headwinds, including geopolitical tensions, geoeconomic fragmentation, volatility in global financial markets, and a global economic slowdown. These external factors pose risks to the economic outlook and require careful consideration.
• Importance of Financial Stability: The RBI emphasized the importance of financial stability, considering it fundamental to price stability and growth. While acknowledging the financial sector’s robust balance sheet, the RBI stressed the need for vigilance and strengthened internal surveillance mechanisms, particularly concerning the rise in personal loans.

Monetary Policy Instruments at RBI’s Disposal

Qualitative Instruments:

• Moral Suasion
  • Non-binding persuasion and communication to influence banks’ lending and investment decisions.
• Direct Credit Controls
  • Regulation of credit flow to specific sectors or industries through RBI directives or credit limits.
• Selective Credit Controls
  • Targeted measures that focus on specific types of loans, like consumer credit, to manage demand in specific economic areas.

Quantitative Instruments:

• Cash Reserve Ratio (CRR)
  • The portion of a bank’s deposits held as cash reserves with the RBI, affecting the funds available for lending.
• Repo Rate
  • The interest rate at which RBI lends short-term funds to commercial banks, influencing their borrowing costs and lending rates.
• Reverse Repo Rate
  • The interest rate at which banks can park excess funds with the RBI, setting a floor for short-term interest rates and managing liquidity.
• Bank Rate
  • The rate at which RBI provides long-term funds to banks and financial institutions, impacting long-term money market rates.
• Open Market Operations (OMOs)
  • RBI’s buying or selling of government securities in the open market, affecting money supply and banking system liquidity.
• Liquidity Adjustment Facility (LAF)
  • Comprises the repo rate and reverse repo rate, used by banks for short-term liquidity needs and daily liquidity management.
• Marginal Standing Facility (MSF)
  • The rate at which banks can borrow overnight funds from RBI using government securities as collateral, serving as a secondary funding source.
• Statutory Liquidity Ratio (SLR)
  • A percentage of a bank’s net demand and time liabilities (NDTL) to be maintained in approved securities.