Sansad TV Perspective: RBI’S Monetary Policy

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: ‘RBI’S Monetary Policy’.

Anchor: Vishal Dahiya

Participants: 

• Subhomoy Bhattacharjee, Consulting Editor, The Business Standard
• Dr Ashok K Nag, Former Adviser, Reserve Bank of India
• Dr Charan Singh, Former Chairman, Punjab & Sind Bank
• Prof. Arvind Mohan, Department of Economics, University of Lucknow

Context: The Reserve Bank of India (RBI), decided to pause its rate hike cycle.

What is monetary policy?

• Monetary policy concerns the decisions taken by central banks to influence the cost and availability of money in an economy.
• Under the Reserve Bank of India, Act, 1934, RBI is entrusted with the responsibility of conducting monetary policy in India with the primary objective of maintaining price stability while keeping in mind the objective of growth. 
• In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
• Under Section 45ZA, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in five years.
  • The Central Government notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target with an upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent. On March 31, 2021, the Central Government retained the inflation target and the tolerance band for the next 5-year period from April 1, 2021, to March 31, 2026.

Source: Business Jargon

Know more about monetary policy in the linked article.

Failure of monetary policy: 

• When the Bank fails to meet the inflation target, it shall set out in a report to the Central Government:
  • The reasons for the failure to achieve the inflation target;
  • Remedial  actions proposed to be taken by the Bank; and
  • An estimate of the time period within which the inflation target shall be achieved pursuant to the timely implementation of proposed remedial actions.

Monetary Policy Committee: 

• Section 45ZB of the amended RBI Act, 1934 provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government by notification in the Official Gazette. 
• The MPC determines the policy repo rate required to achieve the inflation target.
• The MPC is required to meet at least four times a year. The quorum for the meeting of the MPC is four members.
• Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.

Read more on the Monetary Policy Committee in the linked article.

Recent decision  of the RBI:

• The decision to keep the repo rate unchanged was taken unanimously by all six members of the Monetary Policy Committee (MPC).
• The MPC decided to keep the policy repo rate unchanged at 6.5 per cent in this meeting.
• Retail inflation numbers that are taken into account for setting the interest rates stood at 6.44 per cent in February compared to 6.52 per cent in the previous month. RBI projected 5.2 % inflation for FY 24. The Central Bank also marginally raised the GDP growth projection for FY24 to 6.5 % from the earlier estimate of 6.4 %.

Why pause now: 

• The MPC’s decision to pause will give relief to borrowers as the external benchmark-based lending rate (EBLR), which is linked to the repo rate, will not increase.
• There is a fear of recession in the country and across the world. And keeping the repo rate at a higher stance would lead to fastening the process of recession. 
• Additionally, the inflation in the current scenario is mostly because of supply-side constraints not because of any domestic reason within the country. 
• India is the fastest-growing economy in the world and there is scope for huge investment in the country. Raising the interest in the economy would negatively affect the investment purpose. 
• The Indian economy has inherently been very strong and there has been a very fast influx of remittance which is an indicator of the robustness of our economy. 
• At the same time, petroleum prices have been easing out in the coming time. So the inflation is expected to come down as well. 
• India’s manufacturing sector is doing well with a gradual rise in the production capacity in the country. MSME sectors in the country are expected to grow in the coming time. So, it is necessary that they are offered loans at an economical level.
• The Indian banking sector is very robust and they are significantly poised to take India’s growth to the next level. So, the failure of international banks should not hurt our banking sector.

Read all the previous Sansad TV Perspective articles in the link.

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