• UGI USER
  • Jun 22, 2024
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GROWTH SACRIFICE’ VIEW GROWS IN VPC

Why in the news?

  • Ashima Goyal and Jayanth R. Varma, the two external members of the Monetary Policy Committee (MPC), have voiced concerns over the Reserve Bank of India’s (RBI) persistent tight monetary policy.
  • In the latest MPC meeting, both members voted as a minority for a 0.25% rate cut, cautioning against the potential risks of maintaining the current policy stance, which they argue could lead to a ‘growth sacrifice.’
Source: UGI

Background on the Issue:

  • Inflation and Real Repo Rate: Headline inflation at 5%, projected 4.5% for 2024-25, keeping real repo rate too high.
  • Growth Implications: Rising real repo rate may reduce 2024-25 growth to 7% from 8% in 2023-24, potentially distorting real variables.

KEY TERMS:

  • Repo Rate: The interest rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks, helping control inflation and liquidity in the economy.
  • Reverse Repo Rate: The interest rate at which commercial banks park their excess funds with the RBI, used to absorb liquidity from the banking system and control money supply.
Monetary Policy Committee (MPC)

  • Origin: Established under Section 45ZB of the amended RBI Act, 1934 (2016).
  • Objective: Determines the Policy Rate to achieve the inflation target, with decisions binding on the RBI.
  • Composition: Six members:

o   RBI Governor (Chairperson)

o   Deputy Governor (Monetary Policy)

o   One RBI officer nominated by the Central Board

o   Three government-appointed experts in economics, banking, finance, or monetary policy.

Associated Article :

https://universalinstitutions.com/mpc-framework-and-functioning-under-rbi-act-1934/