RBI policy - Why MPC is likely to maintain repo rate pause

What’s in today’s article?

• Why in news?
• What is Monetary Policy Committee (MPC)?
• News Summary: RBI policy - Why MPC is likely to maintain repo rate pause
• Why is RBI likely to maintain status quo?
• Will there be a change in GDP growth forecast?
• Will any liquidity measure be announced?

Why in news?

• The Monetary Policy Committee (MPC) of the RBI is expected to keep the repo rate unchanged at 6.5 per cent for the fourth consecutive time, as consumer price index (CPI) based inflation continues to remain sticky.
  • MPC will meet from October 4 to 6.
• Experts believe that the central bank is also likely to maintain its withdrawal of accommodation stance in the policy.
  • Withdrawal of accommodation means reducing the money supply in the system to rein in inflation further.
  • On the other hand, an accommodative stance means the central bank is prepared to expand the money supply to boost economic growth.

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 inflationtarget. The first such MPC was constituted in September 2016.
• Members of MPC
  • As per the amended RBI act, the MPC shall consist of
    • RBI Governor as its ex officio chairperson,
    • 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.

News Summary: RBI policy - Why MPC is likely to maintain repo rate pause

Why is RBI likely to maintain status quo?

• Domestic challenges
  • These domestic challenges include:
    • growing risks to consumption demand amid soaring food inflation,
    • an uneven monsoon adversely affecting kharif crops,
    • higher interest rates
  • Inflation is still high at 6.8 per cent. While it is expected to come down sharply, there is still some pessimism on Kharif output, especially relating to pulses, which has the potential to push up prices further.
  • Earlier, RBI Governor said the frequent incidences of recurring food price shocks pose a risk to anchoring of inflation expectations, which has been underway since September 2022.
• External challenges
  • rising global crude oil prices
    • International crude oil prices have averaged nearly $89 per barrel.
    • At the time of the last RBI policy, oil prices averaged around $79 per barrel, implying a 12.6 per cent jump in prices since the previous policy.
  • Russia – Ukraine war
    • Russia – Ukraine war is further creating a supply-chain bottlenecks for many commodities.

Will there be a change in GDP growth forecast?

• As per experts, the RBI is unlikely to change its GDP forecast in the upcoming monetary policy.
• The growth fundamentals still remain strong but the key uncertainty remains around the impact of a weak monsoon on agriculture production.
• Also, there is expectation of continued slowdown in Europe and China, weaker exports, and risks to rural demand on the back of weak monsoon activity this year.

Will any liquidity measure be announced?

• As per the experts, the RBI is unlikely to announce any specific liquidity measures as it is tight today.
• Also, the RBI is in the process of rolling back the incremental cash reserve ratio (I-CRR) which was invoked in the August policy.
  • I-CRR is an additional cash balance that banks must maintain over and above the standard CRR.
    • The standard CRR is the percentage of deposits that banks are required to keep with the RBI.
  • The RBI announced the discontinuation of the I-CRR on September 8.
• Despite the gradual withdrawal of the I-CRR, systemic liquidity continued to stay in the deficit since mid-September due to quarterly tax outflows and GST payments.
• Additionally, interventions in the foreign exchange market aimed at supporting the rupee may have marginally contributed to some absorption of rupee liquidity.

Q1) What is monetary policy?

Monetary policy is a set of tools used by a nation's central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.

Q2) What is I-CRR?

Incremental Cash Reserve Ratio (I-CRR) is a monetary policy tool that requires banks to maintain additional cash reserves with the Reserve Bank of India (RBI). The I-CRR was introduced to manage excess liquidity in the financial system.

Source: RBI policy: Why MPC is likely to maintain repo rate pause | RBI | Indian Express