The Hindu Editorial Analysis- 10th June 2024 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Recalcitrant Jumbo

Why in News?

The RBI’s Monetary Policy Committee (MPC) has for an eighth consecutive meeting chosen to leave the benchmark repo rate unchanged at 6.50% on concern that ‘elevated food inflation could derail’ its efforts to ensure durable price stability. Governor Shaktikanta Das, who had just two months ago spoken of the ‘elephant’ of inflation having begun its journey back to the forest after going on a walkabout, flagged the risk that stubborn food price gains pose to the overall disinflation path as justi- fication for the MPC’s stand.

• The Governor of the Reserve Bank of India (RBI) leads the Monetary Policy Committee (MPC), which is responsible for setting the benchmark policy interest rate (repo rate) to manage inflation. The RBI governor is aided in making these monetary policy decisions by an internal team and a technical advisory committee.

What is the Monetary Policy Committee (MPC)?

• Function: The MPC sets India's benchmark interest rate.
• Meeting Frequency: At least quarterly.
• Decision Publication: Decisions are published post-meeting.
• Composition: Six members—three from the Reserve Bank of India and three appointed by the government.
• Confidentiality: A "silent period" surrounds rate decisions for utmost confidentiality.
• Decision-Making: Chaired by the RBI governor; decisions are made by majority vote, with the governor having a casting vote in case of ties.
• Mandate: Maintain 4% annual inflation until March 31, 2026, with a tolerance range of 2-6%.

History and Formation of MPC

• Pre-MPC: The RBI Governor made all significant interest rate decisions alone.
• Establishment: Formed under the Reserve Bank of India Act of 1934 to enhance transparency and accountability in monetary policymaking.
• Meeting Schedule: Meets at least four times a year; monetary policy is published after each meeting with each member’s position declared.
• Initial Suggestion: Urjit Patel Committee first proposed a five-member MPC.
• Government Recommendation: Initially recommended a seven-member committee.
• Support: The Monetary Policy Department (MPD) assists the MPC in policy development.
• Foundation Date: Established on June 27, 2016.
• Implementation: The Financial Markets Operations Department (FMOD) implements monetary policy through daily liquidity management.

Need of Monetary Policy

• Definition: The central bank's approach to using monetary tools to achieve legislative objectives.
• Primary Purpose: Preserve price stability while fostering growth.
• Long-term Condition: Price stability is crucial for sustainable growth.
• Inflation Objective: The RBI Act of 1934 states that the inflation target (4% ± 2%) is set by the Indian government in consultation with the Reserve Bank every five years.

Instruments of Monetary Policy

1. Reverse Repo Rate

• Function: Under the Liquidity Adjustment Facility (LAF), the Reserve Bank of India (RBI) absorbs liquidity from banks by borrowing funds overnight against eligible government assets at a specified interest rate.

2. Liquidity Adjustment Facility (LAF)

• Purpose: Assists banks in managing their liquidity requirements.
• Components: Includes both overnight and term repo auctions.

3. Repo Rate

• Definition: The rate at which the RBI is willing to buy or rediscount bills of exchange or other commercial papers.
• Publication: Listed under Section 49 of the RBI Act 1934.
• Adjustment: This rate is linked to the Marginal Standing Facility (MSF) rate and adjusts automatically with changes in the MSF and policy repo rate.

4. Cash Reserve Ratio (CRR)

• Measurement: Indicates the proportion of a bank's total deposits that must be held in reserve with the RBI.
• Notification: The RBI periodically publishes the required average daily balance that banks must maintain as a percentage of their Net Demand and Time Liabilities (NDTL).

5. Statutory Liquidity Ratio (SLR)

• Purpose: Measures a bank's liquidity by requiring a certain percentage of NDTL to be held in liquid assets like government securities, cash, and gold.
• Impact: Changes in SLR influence the banking system's capacity to lend to the private sector.

6. Open Market Operations (OMOs)

• Activity: Involves the buying and selling of government securities in the open market.
• Objective: To manage liquidity and control money supply in the economy through outright purchases and sales of government assets.

7. Market Stabilization Scheme (MSS)

• Introduction: Launched in 2004 as a financial management tool.
• Function: Utilizes short-dated government securities and Treasury bills to absorb excess liquidity resulting from substantial capital inflows.
• Funds Management: Funds collected under MSS are kept separate from the government’s general funds at the RBI.

Functions of the Monetary Policy Committee (MPC)

1. Formulating Monetary Policy:

   • Sets inflation targets and determines the appropriate policy interest rate to achieve these targets.

2. Inflation Targeting:

   • Aims to maintain price stability by keeping inflation within a specified range, currently set at 4% with a tolerance band of +/- 2%.

3. Repo Rate Decision:

   • Decides on the repo rate, influencing borrowing costs and thereby impacting economic activity and inflation.

4. Economic Analysis:

   • Reviews various economic and financial indicators, including GDP growth, inflation trends, employment levels, and global economic conditions to assess the economy's current and future state.

5. Communication:

   • Communicates policy decisions and the rationale behind them to the public and financial markets to maintain transparency, credibility, and manage expectations.

Major Elements of the MPC

1. Composition:

   • The committee consists of six members.

2. Government Appointments:

   • Three members are appointed by the government, none of whom are government officials.

3. RBI Representation:

   • Three members represent the RBI, including the Governor who serves as the ex-officio Chairperson, the Deputy Governor in charge of monetary policy, and an Executive Director.

Composition of the MPC (Current Members)

1. Governor of the Reserve Bank of India: Shaktikanta Das (Ex-officio Chairperson)
2. Deputy Governor in Charge of Monetary Policy: Michael Debrata Patra
3. Executive Director in Charge of Monetary Policy: Rajiv Ranjan
4. Ashima Goyal: Member of PM Narendra Modi's economic advisory council and professor at Indira Gandhi Institute of Development Research.
5. Shashanka Bhide: Senior advisor at the National Council for Applied Economic Research, with expertise in agriculture, poverty analysis, and macroeconomics.
6. Jayanth Varma: Finance and accounting professor at Indian Institute of Management, Ahmedabad, and former board member of the capital markets regulator.

Importance of the Monetary Policy Committee

• Economic Stability: Ensures stability by regulating key economic indicators like inflation and interest rates.
• Inflation Control: Helps maintain price stability essential for sustainable economic growth.
• Interest Rate Management: Sets benchmark interest rates, influencing borrowing costs, spending, and investment.
• Predictable Policy Framework: Provides a transparent and predictable framework for monetary policy, aiding businesses and investors in decision-making.
• Collaboration: Promotes collaboration between the government and the RBI in shaping monetary policies.
• Expertise Inclusion: Comprising experts from diverse fields, the MPC offers a comprehensive understanding of economic nuances.
• Public Accountability: Enhances accountability as MPC decisions are public, ensuring scrutiny and understanding of policy choices.