RBI Monetary Policy 2024 | Repo Rate Unchanged Amidst Inflation Concerns

What’s in today’s article?

• Why in News?
• What is Monetary Policy Committee (MPC)?
• Key outcomes of MPC 2024
• Other announcements made during MPC 2024

Why in News?

In its first meeting after the Union Budget, the Reserve Bank of India’s Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6.50% for the ninth consecutive time.

Of the six members of the MPC, four voted in favour of the decision, which is aimed at taming inflation.

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 outcomes of MPC 2024

• Policy rates remained unchanged

• MPC decided to keep the policy repo rate unchanged at 6.50%.
• Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds.
• The standing deposit facility (SDF) rate remains at 6.25%, while the marginal standing facility (MSF) rate and the bank rate stand at 6.75%.
• The SDF is a liquidity window through which the RBI will give banks an option to park excess liquidity with it.
• It is different from the reverse repo facility in that it does not require banks to provide collateral while parking funds.
• MSF is a window for banks to borrow from the central bank in an emergency situation when inter-bank liquidity dries up completely.
  • The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.
• An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth.
• Withdrawal of accommodation means reducing the money supply in the system which will rein in inflation further.
• Food prices drive inflation
  • The headline inflation, after remaining steady at 4.8% during April and May, had increased to 5.1% in June.
  • The headline inflation, primarily driven by food inflation, remains stubborn.
• Core inflation (CPI excluding food and fuel) moderated, while the fuel group remained in deflation.
  • Inflation is moderating but the pace of disinflation is uneven and slow. Still there is distance to cover to align inflation with target.
• GDP forecast
  • Real GDP growth for 2024-25 has been projected at 7.2%, with the first quarter (Q1) projection at 7.1%; Q2 at 7.2%; Q3 at 7.3%; and Q4 at 7.2%.
  • Real GDP growth for the first quarter of 2025-26 is projected at 7.2%.

Other announcements made during MPC 2024

• Transaction limit for tax payments via UPI hiked from Rs 1 lakh to Rs 5 lakh
  • RBI announced to increase the transaction limit for tax payment through Unified Payments Interface (UPI) from Rs 1 lakh to Rs 5 lakh per transaction.
  • The move will further ease tax payments by consumers through UPI, which has become the most preferred mode of digital payments.
• The enhancement of the UPI limit for tax payments will strengthen the tax-collection system, reduce the cost of tax collection, and make tax payments more convenient for taxpayers.
• Creation of repository of digital lending apps
  • In a bid to protect customers from fraudulent players in the financial services sector, the Reserve Bank of India is creating a public repository of digital lending applications which will be available on its website.
  • This measure will put some check on the digitalized loan shark business.
  • Aim of RBI is to sensitise the public about unauthorized digital lending App’s and to prevent them from falling prey to digital fraud.
• Focus more on deposit mobilisation via innovative product
  • RBI Governor Shaktikanta Das has expressed concern over the shift of household savings from banks to alternative investment avenues, leading to slower deposit growth compared to credit growth.
  • While deposits grew by 11.7%, credit growth increased by 15.5% as of July 12.
  • RBI Governor urged banks to attract deposits by offering innovative products and leveraging their branch networks to avoid potential liquidity issues.
• Can’t ignore food inflation pressures
  • The Economic Survey for 2023-24 suggested excluding food prices from headline inflation.
  • It argued that food prices were keeping the CPI-based inflation high and delaying interest rate cuts by the RBI.
  • However, RBI Governor disagreed, emphasizing that food inflation, which constitutes about 46% of the CPI basket, cannot be ignored due to its significant impact on the public and overall inflation.
• He acknowledged that while the MPC might overlook temporary food inflation spikes, it must remain vigilant against persistent food inflation to prevent spillovers into other areas of the economy.
• The governor mentioned that the National Statistical Office (NSO) is conducting a survey to reassess the CPI basket, which may influence future decisions on the weight of food, fuel, and core components in headline inflation.

Q.1. What is National Statistical Office (NSO)?

The National Statistical Office (NSO) is the central statistical agency of India, responsible for the collection, compilation, and dissemination of statistical data. It operates under the Ministry of Statistics and Programme Implementation (MoSPI), providing key economic indicators, conducting surveys, and ensuring the accuracy of national statistics.

Q.2. What is Repo Rate?

The repo rate is the interest rate at which a country's central bank, such as the Reserve Bank of India (RBI), lends money to commercial banks for short-term needs. It is a key monetary policy tool used to control inflation, manage liquidity, and influence overall economic activity.

Source: RBI Monetary Policy Meeting: RBI keeps repo rate unchanged at 6.5% | Hindu Business Line | Indian Express  | Indian Express | Economic Times