When it comes to managing the Indian economy, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) plays a cardinal role. Recently, the MPC decided to maintain the policy rates unaltered, considering the shifting macroeconomic scenario. This kept the course after the preceding restrained rate hike of 250 basis points aimed at curbing inflation. The decision embodied a cautious strategy to balance inflation while propelling economic growth.
Monetary Policy Committee Explained
Established under the auspices of the Reserve Bank of India Act, 1934, the Monetary Policy Committee is a statutory and institutionalized framework committed to maintaining price stability and promoting growth. The Governor of RBI presides over the committee as the ex-officio Chairman. The major role of the MPC encompasses determining the policy interest rate (also known as repo rate) necessary to achieve the inflation target.
Key Announcements from the Recent Meeting
During the recent meeting, MPC announced that the policy repo rate under the liquidity adjustment facility (LAF) would remain unchanged at 6.50%. Likewise, the standing deposit facility (SDF) rate stays stalled at 6.25%. Also, the marginal standing facility (MSF) rate and Bank Rate stay pegged at 6.75%.
The MPC’s Stance on Inflation Management
The MPC intends to withdraw accommodation progressively to align inflation with the target while fostering growth. The overarching objective is to attain a medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%.
Inflation Outlook: Factors Affecting Future Trends
Several factors are likely to influence the trajectory of inflation in the future.
Food Price Dynamics: The future course of headline inflation is expected to be influenced by food price dynamics. Wheat prices could see correction due to increased arrivals and procurement at mandis, while milk prices might remain under pressure due to supply shortfalls and higher fodder costs.
Monsoon Impact: A normal southwest monsoon forecast by the India Meteorological Department (IMD) bodes well for kharif crops.
Crude Oil Prices and Input Costs: Despite recent easing, the outlook on crude oil prices is uncertain. Early survey results indicate expectations of firms’ input costs and output prices hardening.
Inflation and Growth Projections
CPI Inflation: Assuming a normal monsoon, the CPI inflation is projected at 5.1% for 2023-24.
GDP Growth: Factors such as higher rabi crop production, envisaged normal monsoon, and a robust services sector are expected to support private consumption and overall economic activity in the current year. On the other hand, weak external demand, geopolitical tensions, and geoeconomic fragmentation can pose risks to growth. Real GDP growth for 2023-24 is projected at 6.5%.
UPSC Civil Services Examination: Previous Year Questions Related to Monetary Policy
To help UPSC Civil Services aspirants understand the relevance of RBI’s monetary policy, several previous year examination questions related to the topic are presented. These questions focus on various aspects of the monetary policy including its components, the role of the Monetary Policy Committee, and how changes in the policy can impact the overall economy.
