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Indian Express

7-October-2023

1) RBI’s MPC Meet

Context:

  • The Reserve Bank of India (RBI) has released its fourth bi-monthly monetary policy on October 6.
  • The Monetary Policy Committee (MPC),led by RBI Governor Shaktikanta Das, held a three-day meeting starting from October 4.
  • The central bank has decided to maintain the repo rate at 50% and has adopted a stance of withdrawal of accommodation.’

Monetary Policy Committee (MPC)

  • The Monetary Policy Committee (MPC) is a body of six members that decides the key policy interest rate and the monetary policy stance of the Reserve Bank of India (RBI).
  • The monetary policy stance is the direction in which the MPC intends to move the policy rate in the near future.

Composition

  • The MPC hasthree members from the RBI, including the Governor, who acts as the chairperson, and two other officials nominated by the RBIThe other three members are external experts appointed by the Government based on their knowledge and experience in economics, banking, finance, or monetary policy.
  • The external members have a term of four years and are not eligible for reappointment.
  • The MPC members have one vote each and in case of a tie, the Governor has a casting vote.

Highlights of the MPC Report

  • The Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6.5%.The repo rate is the rate at which the central bank lends money to commercial banks.
  • Inflation Projection: Inflation forecast too retained at 5.4% for FY24. Cooling vegetable prices, cut in LPG rates to soften inflation.
  • GDP Growth Projection:The MPC retained its projection for real GDP growth in the fiscal year 2023-24 at 6.5%.
  • RBI remains focused on withdrawal of accommodation support growth, tame inflation.
  • India is poised to become new growth engine of world.

What is “withdrawal of accommodation”

  • An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth.
  • Withdrawal of accommodation means reducing the money supply in the system which will rein in inflation further.
  • This is to ensure that inflation progressively aligns with the target, while supporting growth.

Factors which nudged the MPC to hold its stance of withdrawal of accommodation:

  • High prices of tomatoes and other food items
  • Rising crude oil prices
  • The continuation of hawkish monetary policies by systemically important central banks, particularly by the US Federal Reserve.

What is Hawkish Monetary Policy?

  • In order to keep inflation in check, the Hawkish stance favours high-interest rates.
  • Because of the high interest rates, borrowing (taking loans from banks) will become less attractive.
  • Due to a lack of funds, customers would refrain from making purchases or make smaller purchases. They would also avoid obtaining bank credit (loans).
  • As a result there would be Low domestic demand for goods and services. Prices for goods and services would typically stabilise as a result of limited demand. 
  • This would prevent inflation.
  • Also, an increase in interest rates can cause a strengthening of the country’s currency.

Reasons for low GDP projections as compared to last fiscal:

  • The RBI has retained its GDP growth outlook at 6.5 percent for this fiscal.
  • CRISIL sees it at 6 per cent, compared with 7.2 per cent last fiscal for following reasons:
    • Deepening global slowdown curbing exports,
    • Lagged impact of the series of domestic rate hikes manifesting and curbing consumption demand, and
    • Erratic weather and El Niño curbing agricultural growth
    • Persistent supply shocks, whether from food or fuel, can transmit to other parts of the economy and can cause comprehensive inflationary pressures.

Conclusion

  • The MPC has played a crucial role in maintaining macroeconomic stability in India since its inception.
  • It has also demonstrated its flexibility and responsiveness in dealing with unprecedented challenges posed by the COVID-19 pandemic.
  • The MPC will continue to strive for achieving its mandate of price stability while supporting growth in a dynamic and evolving economy.

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