RBI Monetary Policy | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Context

The Reserve Bank of India has raised the repo rate.

Details of Monetary Policy Committee meeting

• The Monetary Policy Committee(MPC) took a unanimous decision to raise the benchmark lending rate by 50 basis points to 5.40%. 
• This was the third hike of the policy repo rate by the RBI this year after a 40 basis points hike in May followed by another hike of 50 basis points in June. 
• RBI Governor highlighted that as Consumer Price Inflation(CPI) remains uncomfortably high and is expected to remain above 6%, MPC decided to focus on withdrawal of accommodative policy stance to check inflation.
• It was also pointed out that domestic economic activity is showing signs of broadening and Bank credit growth has accelerated by 14% as against 5.5% a year ago. 
• RBI has also retained its economic growth projection at 7.2 percent for the current fiscal.

Key Takeaways from the meeting

• The RBI has discontinued the budgetary support it offered during the pandemic.
• The repo rate is higher than it was before the pandemic.
• The RBI's decision to change its accommodative posture has revealed a tightening of monetary policy.

Positive signs in the Indian economy

• Commodity exports are performing well.
• A two to three percent current account deficit is acceptable.
• Other measures, such as GST consumption, are reliable

Reasons for the hike in repo rate

• An increase in repo rate takes into account the actions of other central banks across the globe.
• This was required looking at the global macroeconomics of increasing interest rates.
• A high inflation rate exists in the economy.

Impact of risen interest rates

• The interest rates of deposits will increase.
• The middle-class section of the population will resort to further savings further hitting the demand.
• Global rise in interest rates with falling oil prices will impact Foreign direct investment and Foreign Institutional Investment. This will result in huge withdrawals further hampering the foreign exchange rates.

Reasons for high inflation rate

• High inflation is a phenomenon globally as evident in western countries like US, Britain and other European countries where inflation has touched 7 percent( which is 2 percent otherwise).
• Inflation is unfolding across the world due to:
  • Black swan event
  • Energy crisis
  • Food prices 
  • Russia- Ukraine war
• Some of the domestic policies like that of sudden hike in export rates were not conducive. 

Measures taken by Central Government to control inflation

• The government is working towards controlling inflation by targeted interventions like-
  • Addressing vegetable oil prices challenge.
  • Reduced taxes on crude oil.
• The Atmanirbhar Bharat scheme is also a step undertaken by the government in this direction.
• The global value chains in the pharmaceutical and electronic sectors are also made resilient

Way Ahead

• Both the central bank and the government should work in tandem to address the challenge of inflation and sustained economic growth.
• Inflation is usually seen from the demand side, it should be observed from the supply side as well.
• MSME sector should also be supported as it is a key player in economic growth.
• The goods and services exports should be increased through targeted policy measures.

Conclusion

It will be simple to overcome the global economic crisis if it is ensured that our recovery is long-term sustainable and a planned policy strategy is adopted. Taking into account that the modern economy is interconnected, any impact on the global economy is likely to have a ripple effect on the home economy as well.