RBI’s Monetary Policy

Context: 

In its latest policy review that was unveiled recently, the Monetary Policy Committee (MPC) of the RBI decided to maintain the status quo. The MPC neither changed the repo rate nor its policy stance.

Key Points:

• The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) in its second bi-monthly monetary policy meeting of FY24 decided to leave the repo rate unchanged at 6.5%. 
• The RBI also retained FY24 GDP growth forecast at 6.5%, while expecting  FY24 CPI inflation to be at 5.1%.

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) to maintain liquidity, in case of shortage of funds or due to some statutory measures. 
• It is one of the main tools of RBI to keep inflation under control.

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.

Goldilocks moment 

• A Goldilocks scenario for an economy refers to a point where it is running just perfectly — neither too hot (implying high inflation) nor too cold (referring to faltering GDP growth).

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 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.
• Under the Monetary Policy Framework Agreement, the RBI will be responsible for containing inflation targets at 4% (with a standard deviation of 2%) in the medium term (For more details see here). 
• 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: To determine the policy interest rate required to achieve the inflation target.
• Decision making of MPC: 
  1. The MPC takes decisions based on majority vote (by those who are present and voting). 
  2. In case of a tie, the RBI governor will have the second or casting vote. 
  3. 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

News Source: Indian Express