Monetary Policy Committee of RBI increases interest rates

What’s in today’s article?

• Why in News?
• News Summary

 

Why in News?

• The Monetary Policy Committee (MPC) of RBI increased key interest rates by 35 basis points.
  • 100 basis points (bps) = 1 percentage point.
  • Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
  • MPC determines the policy interest rate required to achieve the inflation target.
• With this, the total increase in rates since May 2022 stands at 225 basis points.
• However, the current increase marks a moderation after three consecutive rate hikes of 50 basis points each by RBI, following the first hike of 40bps in May.

Image Caption: Monetary Policy Committee Review

 

Background:

• On September 30, the RBI hiked the key policy rate (repo) by 50 basis points with an aim to check inflation. It was the third successive hike of 50 bps.
• Before the September hike, the central bank had raised the repo rate by 50 bps each in June and August, and 40 bps in May.

 

News Summary

• Setting the stage for a further rise in lending and deposit rates, the Reserve Bank of India hiked the repo rate by 35 basis points (bps) to 25 per cent to rein in retail inflation.
  • Repo rate is the rate at which the RBI lends money to banks to meet their short-term funding needs.

 

Key highlights

• GDP forecast lowered
  • The MPC lowered the GDP forecast for the financial year 2022-23 to 6.8 per cent from an estimate of 7 per cent earlier.
    • GDP is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
  • This is due to continued risks emanating from protracted geopolitical tensions, global slowdown and tightening of global financial conditions.
• Indian economy continues to remain resilient
  • Despite lowered GDP forecast, the central bank is of the view that the Indian economy continues to remain resilient, drawing strength from its macroeconomic fundamentals.
    • India’s financial system remains robust and stable. Banks and corporations are healthier than before the crisis.
    • Bank credit has been growing in double digits for 8 months now.
    • India is widely seen as a bright spot in an otherwise gloomy world.
    • The rupee has appreciated by 3.2% in real terms even as several other currencies have dropped.
• Recent Performance of Indian economy
  • In Q3, economic activity continues to remain firm. Passenger vehicle sales and domestic air passenger traffic growth remained robust and rural demand is recovering.
  • The drag from net external demand was further accentuated in October, as merchandise exports contracted over 12% in October.
  • On the supply side, agriculture remains resilient, Rabi sowing has got off to a strong start with a 6.8% increase in area sown as on December 2 this year.
  • PMI for Manufacturing and Services also expanded in November. Both manufacturing and Services PMIs in November are among the highest in the world.
    • Purchasing Managers’ Index (PMI) is an economic indicator, which measures activity at the purchasing or input stage.
  • Construction activity is picking up after the monsoon as shown by high growth of steel and cement output.
  • Overall system liquidity remains in surplus and are likely to improve in the period ahead due to factors, which includes moderation in currency in circulation in the post-festive season
  • The growth of services exports, mainly contributed by technology, business services, and travel, continues to be robust.
  • India’s remittances are expected to rise from 89.4 billion dollars in 2021 to over $100 billion this year.
  • FDI flows are stable and foreign portfolio flows, led by equity, have returned to the Indian market.
• Battle against inflation is far from over
  • Inflation is expected to be 6.7% this year, with CPI inflation for the first quarter of 2023-24 projected at 5% and the second quarter at 5.4% on the assumption of a normal monsoon.
  • Pressure points from high and sticky core inflation and exposure of food inflation to international factors and weather-related events do remain.
    • Core inflation is a measure of inflation that captures changes in the price of goods and services, excluding food and energy.
  • While the worst of inflation is behind and it is moderating, there is no room for complacency.
    • For medium term growth, inflation management is important as it ensures price stability and attracts investors to invest in the economy.

 

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Q1) Who established Monetary Policy Committee?

Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC). It determines the policy rate required to achieve the inflation target.

 

Q2) What is 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. RBI to maintain liquidity, in case of shortage of funds or due to some statutory measures.

 

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