Monetary Policy Committee Meeting of RBI

What’s in today’s article?

• Why in News?
• What is Monetary Policy Committee (MPC)?
• Key highlights of the MPC meeting
• New Measures Announced by RBI

Why in News?

The recent Monetary Policy Committee meeting of the RBI Friday kept the repo rate unchanged for the seventh consecutive time at 6.5 per cent.

It also indicated the possibility of retail inflation coming below the crucial level of four per cent in the second quarter (July-September) of FY 2025.

What is Monetary Policy Committee (MPC)?

• The Committee
  • Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
  • MPC will determine the policy interest rate required to achieve the inflation target. The first such MPC was constituted in September 2016.
• Members of MPC
  • As per the amended RBI act, the MPC shall consist of 
    • the RBI Governor as its ex officio chairperson, 
    • the Deputy Governor in charge of monetary policy, 
    • an officer of the Bank to be nominated by the Central Board, and 
    • three persons to be appointed by the central government. 
• Functions of MPC
  • Setting Policy Interest Rates: The primary function of the MPC is to determine the policy interest rates, specifically the repo rate.
  • Inflation Targeting: The current inflation target set by the government is a Consumer Price Index (CPI) inflation target of 4% with a tolerance band of +/- 2%.
  • Economic Analysis and Forecasting: The MPC conducts thorough analysis and forecasting of various economic indicators, including inflation, GDP growth, employment, fiscal conditions, and global economic developments.
  • Decision-Making: The MPC meets at least four times a year to review the monetary policy stance.

Key highlights of the MPC meeting

• Repo rate unchanged
  • The meeting decided to keep the repo rate unchanged at 6.5 per cent.
    • The repo rate is the interest rate at which commercial banks take or borrow money from the Reserve Bank of India.
• Retained the policy stance as withdrawal of accommodation
  • The RBI has retained the policy stance as withdrawal of accommodation despite the deficit in the liquidity in recent weeks.
    • Withdrawal of accommodation means reducing the money supply in the system to control inflation.
• GDP growth and inflation forecast
  • The central bank has retained the GDP growth at 7 per cent and retail inflation at 4.5 per cent for fiscal 2024-25.
    • In February, CPI inflation print stood at 5.09 per cent compared to 5.1 per cent in January.
  • Food inflation continues to exhibit considerable volatility impeding the ongoing disinflation process.
• The prospects of investment activity remain bright
  • This is due to an upturn in the private capex cycle becoming steadily broad-based; persisting and robust government capital expenditure; healthy balance sheets of banks and corporates; rising capacity utilisation.
  • However, headwinds from protracted geopolitical tensions and increasing disruptions in trade routes pose risks to the outlook.
• On Rupee
  • The rupee stayed within a certain range compared to other currencies from emerging markets and some advanced economies during 2023-24. 
  • This stability showed that India's economy is strong, financially stable, and has improved its position in the world market.

New Measures Announced by RBI

• Proposal for cash deposit in banks through UPI
  • Considering the popularity and convenience of UPI, the RBI has proposed to enable UPI for cash deposit facility.
• Proposal for UPI access for Pre-Paid Instruments (PPIs)
  • In order to provide more flexibility to PPIs holders, the RBI has proposed to permit linking of PPIs through third-party UPI applications. 
    • PPIs are a type of financial tool that allows users to load money onto a prepaid account or card for future use. 
  • This will enable the PPI holders to make UPI payments like bank account holders.
    • At present, UPI payments from bank accounts can be made by linking a bank account through the UPI App of the bank or using any third-party UPI application. 
    • However, the same facility is not available for PPIs. PPIs can currently be used to make UPI transactions only by using the application provided by the PPI issuer.
• Proposal for CBDCs via non-bank operators
  • RBI also decided for the distribution of Central Bank Digital Currencies (CBDCs) through Non-bank Payment System Operators.
    • CBDC is the legal tender issued by a central bank in a digital form. The digital rupee (e-Rupee) is the digital currency launched by RBI.
    • RBI has demarcated the digital rupee into two broad categories: general purpose (retail) and wholesale.
  • This will make CBDC – Retail accessible to broader segment of users.
• Proposal to facilitate wider non-resident participation in Sovereign Green Bonds (SGrBs)
  • In another move, the RBI is making it easier for non-residents to participate in Sovereign Green Bonds (SGrBs). 
    • Based on an announcement in the Union Budget for FY 2022-23, the Government had issued SGrBs in January 2023. 
  • They have decided to allow eligible foreign investors in the International Financial Services Centre (IFSC) to invest in these bonds.
  • At present, foreign portfolio investors (FPIs) registered with SEBI are permitted to invest in SGrBs under the different routes available for investment by FPIs in government securities.
• Introduction of Mobile App for RBI Retail Direct Scheme
  • The RBI has decided to launch a Mobile App for its RBI Retail Direct scheme, which was initially introduced in November 2021. 
  • This app will provide individual investors with access to maintain gilt accounts with RBI and invest in government securities. 
    • A gilt account is a savings account for government securities, such as treasury bonds.
    • It is similar to a bank account but uses government securities instead of cash.
  • The scheme allows investors to purchase securities in primary auctions and trade securities through the NDS-OM platform.
• Decided to review the Liquidity Coverage Ratio (LCR) framework
  • Banks included in the LCR framework must keep a reserve of high-quality liquid assets (HQLA) to cover the expected net cash outflows over the next 30 days. 
  • However, recent events in some places have shown that depositors can quickly withdraw or move their deposits during stressful times, especially using online banking.
  • Such emerging risks may require a revisit of certain assumptions under LCR framework. 
  • Therefore, certain modifications to the LCR framework are being proposed towards facilitating better management of liquidity risk by the banks.

Q.1. What are Pre-Paid Instruments (PPIs)?

A prepaid payment instrument (PPI) is a digital payment solution that allows users to store money electronically. PPIs can be used for a variety of transactions, including: Online shopping, Bill payments, Money transfers, and Making purchases without a physical bank account.

Q.2. What is Consumer Price Index (CPI)?

The Consumer Price Index (CPI) is a price index that measures the average change in price over time for a market basket of consumer goods and services. The market basket includes everything from food items to automobiles to rent.

Source: RBI keeps repo rate unchanged at 6.5%, says waiting for inflation ‘elephant’ to walk away

The Hindu

Indian Express