• UGI USER
  • Apr 08, 2024
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“MPC FRAMEWORK AND FUNCTIONING UNDER RBI ACT, 1934”

Syllabus:

  • GS-3- Indian economy , RBI and the functioning of RBI

Focus :

  • The RBI’s Monetary Policy Committee (MPC) has chosen to maintain the benchmark policy repo rate at 6.5%.
  • This decision marks the seventh consecutive meeting where the rate remains unchanged.
Source- RBI

RBI’s Monetary Policy Decision:

  • The above decision was supported by food price pressures as a hindrance to its efforts to curb inflation to the desired 4% target on a sustained basis.
  • RBI Governor Shaktikanta Das highlights the challenge of inflation, likening it to an ‘elephant in the room.’
  • He emphasizes the need for inflation to return to manageable levels for sustained economic stability.
  • The governor underscores the importance of retail inflation aligning with the target rate on a durable basis for the economy’s well-being.
About Monetary Policy :

  • Refers to the policy enacted by the central bank utilizing monetary instruments within its control.
  • Aimed at achieving specified goals outlined in the Act.
  • RBI’s monetary policy primarily aims to maintain price stability.
  • Growth objective is also considered, but price stability is prioritized.

Repo Rate:

  • The repo rate, short for repurchase rate, is the interest rate at which the central bank (such as the Reserve Bank of India) lends money to commercial banks for a short-term period, usually against government securities.

Reverse Repo Rate:

  • The reverse repo rate is the opposite of the repo rate.
  • It is the rate at which the central bank borrows money from commercial banks, typically for short-term periods, and pays interest on the funds borrowed.

Persistent Inflation Concerns:

  • Headline Consumer Price Index-based inflation has exceeded the RBI’s 4% target for 53 consecutive months until February 2024.
  • The MPC expresses concerns over the stubborn unpredictability of both headline and food price inflation.
  • Projections for price stability in the upcoming fiscal year are not entirely reassuring, with CPI inflation expected to hover around 4.9% in the current quarter.
About Monetary Policy Committee:

  • The RBI Act of 1934 was amended by the Finance Act of 2016 to establish a statutory framework for the Monetary Policy Committee (MPC).
  • The primary function of the MPC is to determine the benchmark policy rate (repo rate) aimed at maintaining inflation within the specified target level.
  • Government of India, in consultation with RBI, sets the inflation target (currently 4% with a deviation range of +-2%) once every five years.
  • Composition of the MPC:The MPC consists of six members, including the RBI Governor (Chairperson), the RBI Deputy Governor responsible for monetary policy, one official nominated by the RBI Board, and three members representing the Government of India.
  • External members serve a four-year term.
  • Quorum for Meetings:A minimum of four members, including the Governor or Deputy Governor, constitutes a quorum for MPC meetings.
  • Decision-making:Decisions within the MPC are made through a majority vote.In case of a tie, the RBI Governor possesses the casting vote.
  • The decisions taken by the MPC are binding on the Reserve Bank of India.

Economic Growth Outlook:

  • Despite inflationary pressures, the MPC remains optimistic about economic growth prospects for the year ending March 2025.
  • GDP growth is forecasted to average around 7% during this period, driven by several factors.
  • Factors contributing to the positive growth outlook include expectations of a normal south-west monsoon, which could boost agricultural activity and rural demand.

Consumer Confidence and Spending:

  • The MPC draws attention to the results of the RBI’s consumer confidence survey, indicating improved sentiment among urban households.
  • Rising consumer confidence is expected to translate into increased spending on non-essential items, thereby strengthening private consumption.
  • The anticipated growth in private consumption is crucial for sustaining economic momentum in the face of inflationary pressures.

Policy Space and Priorities:

  • Despite the focus on inflation targeting, the RBI acknowledges the importance of fostering economic growth.
  • The determination to address inflation stems from the recognition that persistent inflationary pressures could dampen discretionary spending and lead to increased personal loans for essential expenses.
  • The RBI emphasizes the non-negotiable nature of price stability for maintaining sustainable economic growth.

Source:The Hindu

Mains Practice Question :

GS-3

 “Analyze the factors influencing the MPC’s decision and assess the implications of this decision on India’s economic stability and growth trajectory.”(250 words)