Q What is the context ?
A Recently, the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept key policy rates Repo rate, Reverse repo rate and the Bank rate unchanged and retained the accommodative policy stance.
- This is the tenth consecutive time that the repo rate has remained unchanged. The central bank had last revised the policy rate on 22nd May 2020.
- Global central banks, including the US Federal Reserve and the European Central Bank (ECB) have turned hawks and are also expected to hike rates soon.
Q What is the Monetary Policy Committee?
- It is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.
- The Governor of RBI is ex-officio Chairman of the committee.
- The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%).
- An RBI-appointed committee led by the then deputy governor Urjit Patel in 2014 recommended the establishment of the Monetary Policy Committee.
Q What are the Key Announcements?
- Repo Rate:
- It has been retained at 4% to boost growth.
- This means banks won’t hike lending and deposit rates and EMIs on loans will remain unchanged.
- Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security.
- Reverse Repo Rate:
- It has been retained at 3.35%.
- Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.
- Bank Rate:
- The Bank Rate unchanged at 4.25%.
- It is the rate charged by the RBI for lending funds to commercial banks.
- Marginal Standing Facility (MSF) Rate:
- This rate has also been retained at 4.25%.
- MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.
- The RBI has projected a 5.3% consumer price (retail) inflation for the current financial year 2021-22 (FY22) despite rising crude oil prices.
- The Consumer Price Index (CPI) monitors retail prices at a certain level for a particular commodity; price movement of goods and services at rural, urban and all-India levels. The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.
- Retail inflation for the next fiscal (FY23) is projected at 4.5%, below the earlier projections.
- The MPC noted that inflation is likely to moderate in the first half of 2022-23 and move closer to the target rate, thereafter providing room to remain accommodative. Timely and apposite supply side measures from the government have substantially helped contain inflationary pressures.
- An accommodative stance means the MPC is willing to either lower rates or keep them unchanged.
- Growth Forecast:
- The central bank has projected the real GDP growth at 7.8% for the next financial year (2022-23).
- Real GDP is a measurement of economic output that accounts for the effects of inflation or deflation.
- The difference between nominal GDP and real GDP is the adjustment for inflation. Since nominal GDP is calculated using current prices, it does not require any adjustments for inflation.
Q Why were Rates kept Unchanged?
- MPC was of the view that continued policy support – status quo on interest rates was warranted for a durable and broad-based recovery after taking into consideration the outlook for inflation and growth, in particular the comfort provided by the improving inflation outlook, the uncertainties related to Omicron and global spill-overs.