RBI Monetary Policy 2024: Key Highlights and Future Outlook

09-02-2024

10:49 AM

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1 min read

What’s in today’s article?

  • Why in News?
  • What is Monetary Policy Committee (MPC)?
  • Key highlights of the decisions
  • Why has MPC hiked GDP growth?
  • RBI's Aspirational Goals for Future Readiness
  • Proposed steps for Internationalisation of INR

Why in News?

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announced its decision on key monetary policy stance, meeting the expectations continuation of the current interest rate.

The meeting was concluded on June 7, 2024 where it decided to keep the repo rate unchanged at 6.5 per cent.

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.

Key highlights of the decisions

  • Repo Rate
    • The Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.5% due to concerns over rising food inflation.
      • 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 repo rate was kept steady at 6.5 per cent for the eighth time in a row as sticky food inflation continues to keep retail inflation high.
  • The standing deposit facility (SDF) – 
    • This rate stands at 6.25%.
    • 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.
  • The marginal standing facility (MSF) rate – It stands at 6.75%.
    • MSF is a window for banks to borrow from the central bank in an emergency situation when inter-bank liquidity dries up completely.
  • GDP Growth
    • The real GDP growth projection for 2024-25 has been revised upwards to 7.2%.
    • As per the RBI, GDP growth outlook is bright and the momentum of economic activity is well sustained. 
    • However, headwinds from geopolitical tensions, volatility in international commodity prices, and geo-economic fragmentation can pose risks to the growth outlook.
  • Inflation
    • The FY25 consumer price index (CPI) based inflation projection remains at 4.5%, with expectations to fall below 4% during the July-September quarter.
      • Under the flexible inflation targeting regime, the RBI aims to keep CPI inflation within a 2-6% range, targeting 4% on a durable basis.
    • While the MPC took note of the disinflation achieved so far without hurting growth, it remains vigilant to any upside risks to inflation, particularly from food inflation.
      • CPI headline inflation softened further during March-April, though persisting food inflation pressures offset the gains of disinflation in core and deflation in the fuel groups.
      • Pulses and vegetables inflation remained firmly in double digits.
    • The RBI has projected CPI for Q1 at 4.9 per cent, Q2 at 3.8 per cent, Q3 at 4.6 per cent and Q4 at 4.5 per cent.
  • Retained the policy stance as withdrawal of accommodation
    • The MPC decided to remain focused on withdrawal of accommodation.
      • 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.
  • Liquidity Situation
    • Liquidity was in deficit in May 2024 at Rs 1.42 lakh crore, compared to a surplus of Rs 20,240 crore in April.
    • As per experts, limited government spending during the general elections contributed to the liquidity pressure.
    • The RBI is expected to maintain tight liquidity to keep pressure on short-term yields, supporting the rupee.
    • The RBI's status quo on the stance indicates no immediate plans to cut interest rates due to uncertainties in food inflation and the Fed policy outlook.

Why has MPC hiked GDP growth?

  • Resilient Domestic Activity: The domestic economic activity has maintained resilience in 2024-25.
    • Rural and urban demand conditions will improve buoyed by monsoon forecast.
  • Manufacturing Strength: Manufacturing activity continues to gain ground, supported by strong domestic demand.
    • The 8 core industries posted healthy growth in April 2024.
    • The PMI in manufacturing exhibited global strength in May 2024.
  • Continued Buoyancy in service sector: The services sector maintained strong performance. PMI services stood at 60.2 in May 2024, indicating robust expansion.

RBI's Aspirational Goals for Future Readiness

  • Key Goals and Initiatives
    •  has not yet fully opened its capital account but aims to achieve full convertibility in the future.
  • Internationalisation of INR: Steps include making the rupee available to non-residents for cross-border transactions and enhancing rupee account accessibility for persons resident outside India (PROIs).
    • An RBI working group led by Executive Director Radha Shyam Ratho recently suggested various measures for the rupee's internationalisation.
  • Digital Payment System: Universalising digital payments and globalising India's financial sector are among the central bank's multi-year objectives.
  • Proposed Measures
    • Interest-Bearing Non-Resident Deposits: The RBI plans a calibrated approach towards these deposits.
    • Overseas Investments: Promoting Indian multinational corporations (MNCs) and global brands through overseas investments is a priority.
    • Capital Account Convertibility: Full convertibility of the rupee for capital account transactions is envisioned.
      • However, this will be subject to preconditions like fiscal consolidation, inflation control, low non-performing assets, low current account deficit, and strong financial markets, as outlined by the Tarapore committee.
  • Strategic Document
    • RBI@100: As the RBI approaches its centenary, it aims to enhance India's global economic footprint with strategies and policy actions to position itself as a model central bank of the global south.
    • The RBI's strategic document will be continuously updated to adapt to global changes.
  • Financial Sector Globalisation and Reforms
    • Banking Expansion: Expanding domestic banking and positioning 3-5 Indian banks among the top 100 global banks.
    • GIFT City: Supporting IFSCA to make GIFT City a leading international financial centre.
    • Addressing the risk associated with Climate change
    • Guidance: Providing guidance for regulated entities to stress test asset portfolios for climate impact.
    • Resilience: Strengthening payment systems' resilience to climate risks and proposing climate risk disclosure norms.

Proposed steps for Internationalisation of INR

  • Short-Term Measures
    • Trade Arrangements: Adopting a standardised approach for bilateral and multilateral trade invoicing, settlement, and payment in rupees and local currencies.
    • Rupee Accounts: Encouraging the opening of rupee accounts for non-residents and integrating Indian payment systems with other countries.
    • Financial Market: Strengthening the financial market with a global 24×5 rupee market and recalibrating the FPI regime.
    • Medium-Term Measures (2-5 Years)
    • Rupee Masala Bonds: Reviewing taxes on rupee masala bonds.
    • RTGS: Promoting international use of RTGS for cross-border trade transactions.
    • Global Bond Indices: Including Indian Government Bonds in global bond indices.
  • Medium-Term Measures (2-5 Years)
    • Rupee Masala Bonds: Reviewing taxes on rupee masala bonds.
    • RTGS: Promoting international use of RTGS for cross-border trade transactions.
    • Global Bond Indices: Including Indian Government Bonds in global bond indices.

Q.1. What is GIFT City?

The full form of GIFT City is Gujarat International Finance Tec-City. It is a business district comprising commercial and residential spaces, with the commercial spaces used to develop infrastructure to offer global financial services to investors. The business segment of GIFT City includes Offshore Banking, asset management and insurance.

Q.2. What is Marginal Standing Facility (MSF)?

The Marginal Standing Facility (MSF) is a window for banks to borrow funds from the Reserve Bank of India (RBI) in emergency situations when inter-bank liquidity dries up completely. It allows banks to access emergency funds overnight.

Source: Monetary Policy 2024: High food inflation, RBI retains rate at 6.5%; ups FY25 GDP forecast to 7.2% | RBI | Indian Express | Indian Express | Economic Times