RBI maintained its benchmark interest rate at 6.5% for the 10th successive monetary policy review since April 2023.
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- The RBI maintained the repo rate at 6.5% due to robust domestic growth and concerns over inflation despite a slight dip in Q1 FY2025 growth.
- The stance shifted to ‘neutral’ focusing on growth, cautious of potential geopolitical risks impacting inflation
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About Repo rate
- Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Central Bank of our country i.e. Reserve Bank of India (RBI).
- It is one of the main tools of RBI to keep inflation under control.
Monetary Policy Committee
- Monetary Policy Framework Agreement 2015: MPC was set up consequent to the agreement reached between Government and RBI to task RBI with the responsibility for price stability and inflation targeting.
- Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee.
- The first such MPC was constituted in 2016.
- Inflation Target: RBI is responsible for containing inflation targets at 4% (with a standard deviation of 2%) in the medium term.
- The Central Government determines the inflation target in terms of the Consumer Price Index, once in every five years in consultation with the RBI.
- Function MPC: To determine the policy interest rate required to achieve the inflation target.
- Quorum for a meeting: Four Members, one of whom shall be the Governor and, in his absence, the Deputy Governor, who is the Member of the MPC.
- Decision making of MPC:
- The MPC takes decisions based on majority vote (by those who are present and voting).
- In case of a tie, the RBI governor will have the second or casting vote.
- The decision of the Committee would be binding on the RBI.
- Members of MPC
- RBI Governor as its ex-officio chairperson
- Deputy Governor in charge of monetary policy
- An officer of the Bank to be nominated by the Central Board
- Three persons to be appointed by the central government
- Policy stance: The policy stance tells everyone what the MPC is trying to achieve by its actions.
- A policy stance tells us whether the MPC is trying to contain inflation or boost growth while containing inflation or simply being neutral.
- Various policy stance of MPC can be categorised as shown in table below:
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| Accommodative |
- Central bank is prepared to expand the money supply to boost economic growth.
- Willing to cut the interest rates i.e Rate hike is ruled out
- Adopts an accommodative policy when growth needs policy support and inflation is not the immediate concern.
|
| Neutral |
- Central bank can either cut rate or increase rate
- Adopted when the policy priority is equal on both inflation and growth.
|
| Hawkish Stance |
- Central bank’s top priority is to keep inflation low.
- Central bank is willing to hike interest rates to curb money supply and thus reduce the demand.
- Also indicates tight monetary policy.
- Increases rates or ‘tightens’ the monetary policy indicating Banks to increase their rate of interest on loans to end borrowers.
- It curbs demand in the financial system.
|
| Calibrated Tightening |
- During the current rate cycle, a cut in the repo rate is off the table.
- However, the rate hike will happen in a calibrated manner.
|
October 10, 2024
