India’s Monetary Policy

India’s Monetary Policy

News: In its October meeting, the monetary policy committee (MPC) of the RBI voted unanimously to maintain status quo on rates. The policy repo rate stands at 6.5 per cent.

What is Monetary policy?
• Monetary policy refers to the policy of the central bank with regard to the use of monetary instrumentsunder its control to achieve the goals specified in the Act.
• The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth.

Why did the MPC maintain status quo on interest rates?
• According to RBI governor, the transmission of past rate hikes – 250 basis points since May 2022 – to bank lending and deposit rates remain incomplete.
• Internal factors such as Higher food inflation as seen in months of July when it surged to 15month high of 7.44%.
• El-Nino conditions are predicted till year end.
• Current suboptimal reservoir levels. According to Central Water Commission live storage at reservoirs has been less compared to previous year which may influence irrigation activities especially for Rabi crops in winter.
• Crude oil price has been volatile and cuts in oil production as signaled by OPEC countries is another concern which may drive headline inflation in India.
• Central banks in USA and EU are also expected to favour another rate hike thus growth prospects are dim globally which will further slowdown exports, slowdown in demand etc.

Key Facts that you should remember
• RBI has raised inflation forecast for this fiscal to 5.4 percent from 5.2 percent made in June.
• RBI has retained its GDP growth outlook at 6.5%.

What are monetary policy tools available for The RBI?
• Repo Rate and Reverse Repo Rate
• Marginal Standing Facility
• Liquidity Adjustment Facility
• Statutory Liquidity Ratio
• Open Market Operations
• Cash Reserve Ratio