Monetary Policy Update from the Reserve Bank of India

  • This article covers the MPC’s (Monetary Policy Committee) recent policy review and its implications for India’s economy.
  • The MPC is in charge of setting the repo rate and formulating the policy stance to achieve certain economic goals.

Highlights from the RBI

  • Repo Rate: 6.50% remained unchanged.
  • The rate for the Standing Deposit Facility (SDF) remains unchanged at 6.25%.
  • The MSF rate and the bank rate remain unchanged at 6.75%.
  • Inflation objective: A medium-term inflation objective of 4% within a +/- 2% area for the Consumer Price Index (CPI).
RBI Monetary Policy Committee
PurposeMake decisions on monetary policy in India
Constituted byRBI Act, 1934
ObjectiveMaintain price stability and foster economic growth
Members3 officials from the RBI, 3 external members appointed by the Government of India
ChairpersonGovernor of the RBI
Decision FactorsEconomic and financial developments Inflation trends Macroeconomic conditions
Key ToolsPolicy interest rate (Repo rate) Policy stance
Impact of DecisionsBorrowing costs Liquidity in the banking system Overall economic environment

Various MPC tools

Repo RateRate at which the central bank lends money to commercial banks
Reverse Repo RateRate at which the central bank borrows money from commercial banks
Cash Reserve Ratio (CRR)Portion of banks’ deposits that they must hold as reserves with the central bank
Statutory Liquidity Ratio (SLR)Percentage of certain assets that banks are required to maintain in their portfolio
Open Market Operations (OMOs)Buying and selling of government securities by the central bank in the open market
Marginal Standing Facility (MSF)Facility allowing banks to borrow funds overnight from the central bank against eligible securities
Liquidity Adjustment Facility (LAF)Repo and reverse repo rates used by banks to manage their liquidity needs
Policy Stance and CommunicationMPC’s approach to monetary policy and communication of decisions and outlook

Key outlooks

  • GDP growth and inflation projections: GDP growth forecasts provide information about the predicted speed of economic progress, whilst inflation forecasts aid in determining price stability and purchasing power.
  • Forecast stability: The latest MPC assessment shows minimal change in GDP growth and inflation estimates, indicating a steady economic outlook.
  • The Goldilocks economic metaphor: The term “Goldilocks moment” refers to an ideal situation in which the economy runs optimally, achieving a balance between rising inflation (too hot) and slowing GDP growth (too cold). Consumer confidence and inflation expectations polls conducted by the RBI indicate a favourable and favourable economic climate.

Positive Evolutions

  • Surprising GDP increase: India’s GDP growth in FY23 exceeded the RBI’s forecast, achieving 7.2% rather than the predicted 7%.
  • Reduced headline retail inflation: Retail inflation fell to 4.7% in April, the lowest level since November 2021.
  • Recovery of consumption and private investment: The expectation of a robust Rabi crop production and a normal monsoon, together with the government’s emphasis on capital expenditure, suggests that consumption and private investments may rise.
  • Consumer confidence is progressively increasing, and Indian families anticipate that inflation will settle at a more reasonable level.

Important factors

  • GDP deceleration expected: Despite good trends, the MPC expects GDP growth to decline from 7.2% to 6.5% in FY24, with professional analysts predicting even lower growth of 6%.
  • Consumer confidence remains in the negative zone: While consumer confidence indices are improving, they remain below 100, reflecting widespread pessimism among the general public.
  • Winds of change and prospective economic challenges: Various dangers to India’s economy include sluggish global demand, volatility in global financial markets, geopolitical tensions, and the probable influence of El Nino on the monsoon.
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