News Highlight
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) published its current monetary policy review.
Key Takeaway
- The RBI decreased its prediction for India’s GDP growth for the current fiscal year, kept its prediction for inflation, and increased the repo rate by 35 basis points.
Monetary Policy Review
- The need for monetary policy reviews
- Preserving price stability is the primary goal, but growth is also a consideration.
- The central bank’s target for retail inflation is 4%, but the RBI can allow inflation to reach 6% or drop to 2% in any given month.
- An acceptable level of inflation is preferred because it stimulates the economy.
- The interest rate the RBI charges banks when it extends loans to them rises when inflation is high.
- This encourages saving and discourages spending, which reduces overall demand and GDP.
- When economic activity is weak, the RBI lowers the repo rate, which increases demand and economic output by applying the opposite logic.
- The MPC meets every two months to discuss the outlook for inflation and GDP and makes all these crucial decisions on the repo rate.
- The significance of the latest policy review
- Indian policymakers face an odd quandary.
- India was already undergoing a significant GDP slump before the Covid epidemic.
- Due to supply shortages brought on by the pandemic and Russia’s conflict in Ukraine, inflation spiked.
- The RBI prioritised economic recovery but doing so resulted in high inflation, which primarily hurts the poor.
- Since the beginning of 2022, inflation has surpassed the 6% threshold.
- The government asked the RBI to justify why it had let this occur.
What about GDP growth?
- The RBI has lowered the GDP prediction modestly for the second MPC in a row.
- It anticipates that the GDP will increase by 6.8% during the current fiscal year.
- Even now, the RBI’s April projection for Q3 and Q4 GDP growth has surpassed the quarterly estimates.
- Higher interest rates progressively drag down the economy.
- The RBI may need to maintain its hawkish stance for a while.
- The next MPC meeting in February 2023 could see another downward revision to the GDP prediction.
Monetary Policy Committee
- About
- Section 45ZB of the amended RBI Act, 1934, provides for an empowered six-member Monetary Policy Committee (MPC).
- Formation
- The MPC is to be constituted by the Central Government by notification in the official Gazette.
- The first such MPC was constituted on September 29, 2016.
- Objective
- The MPC determines the policy repo rate required to achieve the inflation target.
- Working
- The MPC must meet at least four times a year. The quorum for the meeting of the MPC is four members.
- The decision of the MPC shall be final and binding on the banks.
- Instruments of Monetary 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.
- LAF Corridor
- The LAF Corridor has the Marginal Standing Facility (MSF) rate.
- Marginal Standing Facility (MSF) rate
- The penal rate at which banks can borrow from the Reserve Bank overnight.
- Cash Reserve Ratio (CRR)
- Statutory Liquid Ratio (SLR)
Way Forward
- We must be resilient and confident in the face of the current hurricane.
- India is decoupled from the global economy in several aspects; it cannot be entirely decoupled in an interconnected world.
Pic Courtesy: Indian Express
Content Source: Indian Express