The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) plays a pivotal role in steering the monetary policy of the nation. Recently, the MPC made some significant decisions including maintaining the policy repo rate at 6.5% and revising the inflation projection for the current fiscal year (2023-24). The MPC also imposed a temporary 10% Incremental Cash Reserve Ratio (I-CRR) to absorb the excess liquidity in the banking sector.
The decision to leave the repo rate unchanged was unanimous, taken with a view to balance economic growth and control inflation. Retail inflation projections have been increased by 30 basis points to 5.4%, accommodating an upward trend in headline inflation driven partly by rising vegetable prices. GDP projections were kept at 6.5%.
Understanding Incremental Cash Reserve Ratio
From 12th August 2023, banks will need to maintain an Incremental Cash Reserve Ratio (I-CRR) of 10%. This requirement applies to their net increase in demand and time liabilities between May 19, 2023, and July 28, 2023. The move is aimed at absorbing surplus liquidity, particularly resulting from demonetisation of Rs. 2000 notes.
Is the Recent RBI’s Move Related to the HDFC Ltd-HDFC Bank Merger?
Speculation suggests that the move to introduce an additional CRR might be an attempt to offset potential profits that HDFC Bank could have made during the grace period post-merger with HDFC Ltd. However, the RBI has not confirmed this assertion.
Excess Liquidity: Measures that RBI can Adopt
To manage excess liquidity, the RBI has several tools at its disposal. These include reverse repo operations, foreign exchange operations, and moral suasion. Although these methods have their own set of pros and cons, they provide a framework for managing liquidity effectively without upsetting the balance of the economy.
Terminology Explained: CRR, I-CRR, Repo Rate, and Inflation
This section provides a simple explanation of key terms such as Cash Reserve Ratio (CRR), Incremental CRR (I-CRR), Repo Rate, inflation, headline inflation, core inflation, and inflation targeting. Understanding these concepts is crucial to comprehend the measures taken by the RBI and their impact on the economy.
The Implications of Excess Liquidity in India
Excess liquidity can have both positive and negative implications. On the plus side, it can lead to lower interest rates, stimulating investment and promoting economic growth. On the downside, it can contribute to inflationary pressures, exchange rate volatility, asset price bubbles, and income inequality.
Managing High Inflation and High Liquidity Simultaneously
Despite the challenges, it is possible to manage high inflation and high liquidity simultaneously. This can be achieved through a cautious approach to interest rate adjustments, engaging in controlled Open Market Operations (OMOs), and adopting targeted fiscal measures.
UPSC Civil Services Examination Related Questions
In this section, previous year questions from the UPSC Civil Services Examination related to the topic are discussed, providing candidates with a practical application of their knowledge. This includes questions on the weightage of food in the Consumer Price Index (CPI) versus the Wholesale Price Index (WPI) and actions the RBI would take to adopt an expansionist monetary policy.
