Monetary Policy Committee (MPC) to maintain the policy repo rate at 6.5% UPSC

Copyright infringement not intended

Context: The Reserve Bank of India's Monetary Policy Committee (MPC) recently unanimously opted to maintain the policy repo rate at 6.5% while raising its forecast for retail inflation in the current fiscal year by 30 basis points to 5.4%.

Details

Highlights of the MPC Report

The Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6.5%. The repo rate is the rate at which the central bank lends money to commercial banks.
Inflation Projection: The projection for retail inflation in the current fiscal year was raised by 30 basis points to 5.4%. This increase in projection was influenced by factors like rising vegetable prices.
Inflation Concerns: The increase in inflation was attributed to rising vegetable prices. There were also concerns about possible El Niño weather conditions and global food prices, along with a skewed monsoon pattern.
Rate Hike Impact: The cumulative rate hike of 250 basis points implemented by the MPC is affecting the economy, but domestic economic activity is holding up well and is expected to maintain momentum despite weak external demand.
GDP Growth Projection: The MPC retained its projection for real GDP growth in the fiscal year 2023-24 at 6.5%.
CPI Inflation Projection: The Consumer Price Index (CPI) inflation projection for 2023-24 was revised upwards to 5.4% from the earlier 5.1% forecast. The projections for different quarters were provided as well.
Excess Liquidity: To manage excess liquidity in the banking system, the RBI announced a measure that scheduled banks would need to maintain an incremental cash reserve ratio of 10% on the increase in their net demand and time liabilities between specific dates.
Temporary Measure: The measure to absorb excess liquidity was termed temporary and was intended to manage the surplus liquidity created by factors such as the return of certain currency notes to the banking system. It was emphasized that despite this measure, there would still be sufficient liquidity in the system to meet the credit needs of the economy.

This statement reflects the RBI's efforts to balance inflation control with economic growth, and its decision-making process to manage various economic factors such as inflation, liquidity, and growth.

Must Read Articles:

Monetary policy committee: https://iasgyan.in/daily-current-affairs/monetary-policy-committee-highlights#:~:text=Composition%3A%20The%20committee%20comprises%20six,ex%20officio%20of%20the%20committee.

RBI’s MPC Meet: https://www.iasgyan.in/daily-current-affairs/rbis-mpc-meet

PRACTICE QUESTION

Q. What is the significance of the Monetary Policy Committee (MPC), and how does its decision-making impact a country's economy? What are some challenges that the MPC might face in its role, and what strategies could be considered for moving forward effectively in shaping a country's monetary policy

https://epaper.thehindu.com/ccidist-ws/th/th_delhi/issues/47255/OPS/GBJBJPE5J.1+GK5BJR1LM.1.html

MPC MEET HIGHLIGHTS