The Monetary Policy Committee (MPC) is a high-level body that shapes the financial parameters of the Indian economy. In its bimonthly meetings, the Reserve Bank of India (RBI) led MPC decides on critical economic measures such as inflation targets, policy repo rate, GDP projections and other related parameters.
RBI’s Bimonthly MPC Meetings: A Snapshot
Recently, the MPC held its bimonthly review where it decided to retain the benchmark interest rates unchanged for the 5th time consecutively. This implies that the key repo rate, which governs how much the RBI lends money to commercial banks in the event of a shortfall of funds, has remained at 6.5% for five reviews.
Key Decisions from the Latest MPC Meeting
Other important metrics decided upon during this meeting included Standing Deposit Facility (SDF) at 6.25%, Marginal Standing Facility Rate at 6.75%, Cash Reserve Ratio (CRR) at 4.50% and Statutory Liquidity Ratio (SLR) at 18.00%. The SDF aids banks to park excess liquidity with the RBI without needing to provide collateral. The MSF is a window for scheduled banks to borrow from the RBI overnight in an urgent situation when interbank liquidity runs out.
Projections for the Indian Economy
The committee also raised the GDP growth projection for 2023-24 to 7% from earlier 6.5%, reflecting a solid 7.6% growth in the second quarter of 2023-24 FY. The Consumer Price Index (CPI) based inflation forecast for the fiscal year 2023-24 has been maintained at 5.4%.
Additional Initiatives by RBI
Aside from these key decisions, the RBI also announced a hike in the UPI limit for Health and Education transactions from Rs 1 lakh to Rs 5 lakh per transaction. The recurring e-payment mandates for credit card, insurance premia payments, and mutual fund investments were expanded to Rs 1 lakh from Rs 15,000.
Moving Towards Digital Lending Transparency
In the interest of boosting transparency and customer-centricity in digital lending, RBI is planning a regulatory framework for web-aggregation of loan products. Furthermore, RBI is encouraging partnerships with Fintechs and proposed creation of a Fintech Repository by April 2024 to keep track of the growing incidence of banks and non-banking finance companies (NBFCs) partnering with Fintechs.
Understanding Inflation and Liquidity
Inflation refers to a sustained increase in the general price level of goods and services in an economy over a period of time. In India, the ‘Headline Inflation’ comprises food and fuel inflation, while ‘Core Inflation’ excludes volatile goods like food and beverages including vegetables, fuel and light from the basket of commodities. Inflation targeting is a monetary policy framework aimed at maintaining a specific target range for inflation.
Liquidity, on the other hand, refers to how quickly an asset or security can be bought or sold in the market without significantly affecting its price.
Reflecting on Previous MPC Decisions Through UPSC Civil Services Examination Questions
Previous questions from the UPSC Civil Services Examination give us a peek into understanding the Monetary Policy Committee (MPC) and its decision-making process. For instance, in 2017, the examination asked about the composition and functioning of the MPC and in 2020, the candidates were tested on the impacts of different monetary policy decisions on the Indian economy.
