Sansad TV Perspective: RBI's Monetary Policy Review

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 Review

Anchor: Teena Jha

Guests:

1. Dr. Ashok K. Nag, Former Advisor, Reserve Bank of India
2. Subhomoy Bhattacharjee, Consulting Editor, Business Standard
3. Dr. Charan Singh, Former Chairman, Punjab & Sind Bank

Context – Announcing the bi-monthly monetary policy, the RBI has hiked the repo rate by another 25 basis points, taking it to 6.5%. This is the sixth time RBI has hiked the interest rate since May 2022, taking the total quantum of the hike to 250 basis points.

Introduction –

 Monetary policy refers to the policy of the central bank, RBI with regard to the use of monetary instruments under its control to regulate magnitudes such as interest rates, money supply and availability of credit. The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth.

• The Monetary Policy Committee (MPC) is an empowered six-member body under the Reserve Bank of India (RBI) Act, 1934 (as amended in 2016). 
• The MPC’s primary responsibility is to conduct monetary policy in India with the objective of maintaining price stability while considering the growth objective. It is chaired by the governor of the RBI.
• The MPC meets at least four times a year and is tasked with determining the policy repo rate required to achieve the inflation target set by the Central Government in consultation with the RBI.
• The inflation target is determined once in five years and is measured by the Consumer Price Index (CPI) (Inflation target 4%+ -2%).

Hike in Repo Rate – 

The repo rate is an important component of the monetary policy of the nation, and it is used to regulate the liquidity, inflation, and money supply of the nation. Additionally, repo rate levels create a direct impact on the pattern of borrowing by the banks.

• The repo rate is the interest rate at which RBI lends money to commercial banks. This indirectly affects the interest rates of home loans, car loans, etc. Repo rate also has an impact on both bank depositors and loan takers. 
• The Reserve Bank of India has hiked the repo rate by another 25 basis points, taking it to 6.5%. Announcing the bi-monthly monetary policy, RBI Governor Shaktikanta Das said the Monetary Policy Committee, by a majority (4:2), decided to raise the policy repo rate by 25 basis points. Additionally, the MPC also retained its stance on the withdrawal of accommodation to ensure that inflation remains within the target while supporting growth by the same majority.
• The central bank also projected India’s economic growth at 6.4% for 2023-24, broadly in line with the estimate of the Economic Survey. The Economic Survey 2023-24 projected a baseline GDP growth of 6.5 per cent in real terms for the next fiscal.

Reasons  for the hike in Repo Rate

An increase in the repo rate means that the cost of funds for banks will go up. In other words, this will disincentive banks from borrowing from the central bank. 

• The increase in the repo rate will reduce the money supply in the economy and arrest inflation. The world economy does not look so grim now as inflation is coming down. However, it is not a continuous downward trend and inflation remains well above the target in major economies.
• The core inflation is above 6%. Core inflation generally refers to inflation in manufactured goods, which remains sticky or stubbornly high. While inflation is expected to moderate in 2023-24, it is likely to be over the 4% target.
• Tighter financial conditions caused by aggressive monetary policy actions, volatile financial markets, debt crisis, protracted geopolitical hostilities, and fragmentation continue to impart high uncertainty to the outlook for the global economy.

RBI’s Growth Projection

The real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent, Q2 at 6.2 per cent, Q3 at 6 per cent and Q4 at 5.8 per cent. However, the outlook is clouded by continuing uncertainties from geopolitical tensions, global financial market volatility, rising non-oil commodity prices and volatile crude oil prices.

RBI’s Inflation Projection

Inflation has been moderating in the country on account of lower vegetable prices, but core inflation (which excludes food and energy prices) remains an area of concern. Retail inflation is expected to come down to 5.3% in 2023-24.

• In 2023, inflation had soared as high as 7.79 in April, which prompted a series of hikes by the RBI in a bid to control it. 

Hike in repo rate affects consumers –

Since the repo rate is hiked banks will now have to pay higher interest to the RBI which in turn would burden the retail and corporate borrowers of banks as the interest rate on loans taken from the banks would also increase. Therefore, loans including home, auto, personal and so on, are expected to become costlier.

Conclusion – The policy is focused on managing inflation, even though the recent retail inflation is showing signs of moderation. The RBI has given considerable emphasis on high core inflation pressures and assumes it as a major risk to the growth outlook.

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

Sansad TV Perspective: RBI’s Monetary Policy Review:- Download PDF Here