The Hindu Editorial Analysis- 27th October 2023 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Renewed risks

Why in News?

On October 6, the Reserve Bank of India (RBI) stuck to its 6.5% GDP growth projection for the year, with risks from geopolitical tensions, economic fragmentation, volatile financial markets and an uneven monsoon, evenly balanced out by strengthening domestic demand. 

What are the Key Highlights of the MPC Meeting?

• Repo Rate Unchanged: The RBI, with unanimous decision, maintains the policy repo rate at 6.5% to strike a balance between economic growth and inflation control.

• GDP Growth and Inflation: The RBI keeps its 2023-24 real GDP growth forecast at 6.5% and the average CPI inflation forecast for FY24 at 5.4%. However, the MPC raised its projection for second-quarter headline inflation to 6.4%. The RBI Governor emphasizes commitment to the 4% inflation target and the need to act promptly to prevent food and fuel price shocks from affecting underlying inflation trends.

• Liquidity Management and Financial Stability: The RBI will actively manage liquidity in accordance with the monetary policy stance and will use Open Market Operations (OMO) sales as needed. Financial stability is vital for both price stability and economic growth.

• Gold Loan under Bullet Repayment Scheme: The RBI doubles the lending limits for Gold Loans under the Bullet Repayment Scheme (BRS) to Rs 4 lakh for urban cooperative banks that meet Priority Sector Lending (PSL) targets as of March 31, 2023. BRS allows borrowers to repay both interest and the principal amount at the end of the loan tenure, without worrying about repayment during the loan period.

• Accommodative Stance: The RBI maintains its stance of 'withdrawal of accommodation' until all inflation risks subside. An accommodative stance implies the central bank's readiness to increase the money supply to stimulate economic growth. Withdrawal of accommodation signifies reducing the money supply to further control inflation.

What are the Reasons for Keeping Benchmark Rates Unchanged?

• Resilient Economic Activity:
  • Despite uncertainties and challenges, the Indian economy has shown resilience.
  • This confidence has led to the decision to maintain benchmark rates.
• Previous Policy Repo Rate Hikes:
  • The Monetary Policy Committee (MPC) considered a total of 250 basis points in previous policy repo rate hikes.
  • Due to the time required for these hikes to take full effect, the committee chose not to change rates in the current meeting.
  • The MPC acknowledged that the impact of previous rate hikes is still ongoing.
• Inflation Risk Management:
  • The MPC is dedicated to achieving a 4% inflation target on a lasting basis.
  • The current policy stance is deemed necessary for this objective and doesn't require an immediate rate adjustment.
  • The MPC expressed concerns about the possibility of food price shocks causing inflation spikes.
  • Maintaining current rates might serve as a precautionary measure to closely monitor the situation and be prepared to take action if inflationary pressures increase.

What are the Concerns Flagged by the RBI in its MPC Meeting?

High Inflation:

• The Reserve Bank of India (RBI) considers high inflation a significant threat to macroeconomic stability and sustainable growth.
• Despite a decrease in core inflation (excluding food and fuel), there are uncertainties surrounding overall inflation.
• Factors like reduced kharif sowing for essential crops, low reservoir levels, and fluctuations in global food and energy prices contribute to this uncertainty.

Geopolitical and Economic Risks:

• The RBI has identified various challenges, including geopolitical tensions, geoeconomic fragmentation, volatility in global financial markets, and a potential global economic slowdown.
• These external factors present risks to the economic outlook and require careful consideration.

Financial Stability and Surveillance:

• The RBI emphasizes the importance of financial stability, which is deemed fundamental for price stability and economic growth.
• The financial sector is recognized for its robust balance sheet, but the RBI advises vigilance and enhanced internal surveillance mechanisms, particularly in relation to the increase in personal loans.