The Monetary Policy Committee (MPC) is a six-member committee that operates under the Reserve Bank of India (RBI). Established with a recommendation from an RBI-appointed committee led by then-deputy governor Urjit Patel, it’s a statutory and institutionalized framework conceived under the Reserve Bank of India Act, 1934. The primary objectives of the committee include maintaining price stability while also focusing on growth. The Governor of RBI serves as the ex-officio Chairman of the MPC.
The committee is responsible for determining the policy interest rate, known as the repo rate, which is essential for achieving the inflation target. The central bank last revised the policy rate on May 22nd, 2020, and since then, it has been unchanged for the tenth consecutive time.
Global central banks like the US Federal Reserve and the European Central Bank (ECB) have also switched their stance and are expected to hike rates soon.
Repo Rate and Reverse Repo Rate: What Do They Mean?
Repo rate refers to the rate at which the central bank of a country lends money to commercial banks during a shortfall of funds. In this arrangement, the central bank purchases the security. The repo rate in India has been retained at 4% to boost growth. This means that banks won’t increase lending and deposit rates, thereby keeping EMIs on loans constant.
Reverse repo rate, on the other hand, is the rate at which RBI borrows money from commercial banks within India. The current reverse repo rate stands at 3.35%.
Bank Rate and Marginal Standing Facility Rate Explained
The Bank Rate, currently unchanged at 4.25%, is the rate charged by the RBI for lending funds to commercial banks.
Moreover, the Marginal Standing Facility (MSF) rate, which is the rate at which scheduled banks can borrow overnight from RBI during emergency situations, has also been kept constant at 4.25%.
Inflation and Growth Forecast
Despite rising crude oil prices, the RBI has projected a 5.3% consumer price (retail) inflation for the current fiscal year 2021-22 (FY22). Retail prices are monitored at a certain level for specific commodities, with the change in price index over time referred to as CPI-based inflation or retail inflation. The RBI predicts a moderated inflation rate of 4.5%, lower than previous projections, for the next financial year (FY23).
The central bank has also forecasted real GDP growth, which accounts for the effects of inflation or deflation, at 7.8% for the next financial year.
Why Were the Rates Unchanged?
The MPC justified their decision to keep the rates unchanged by pointing towards the necessity for continued policy support to ensure a durable and broad-based recovery. In making their decision, they took into account the outlook for inflation and growth, uncertainties related to the Omicron variant, and global spill-overs. The improving inflation outlook gave them comfort in maintaining the status quo. This approach is described as an accommodative stance, implying that the MPC is willing to either decrease rates or keep them unchanged.