Monetary policy is a significant aspect of a country’s financial landscape, impacting both growth and development. Recently, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) disclosed its latest review of the nation’s monetary policies. This article will delve into the crucial points of this review, the Monetary Policy Framework, details about the MPC and the instruments used in monetary policy.
The RBI’s Monetary Policy Review: Key Findings
The world’s economic growth prospects are dwindling, with financial markets exhibiting high levels of volatility and price swings. The RBI’s review indicates that this global unease could influence India’s economy.
GDP Growth Forecast
The MPC lowered its GDP growth prediction for fiscal year 2022-23 to 6.8%, down from 7%. This revision arrived after the World Bank increased its growth forecast to 6.9% for the same period. The Real GDP growth is projected at 7.1% for Q1:2023-24 and 5.9% for Q2. Meanwhile, in September 2022, the GDP forecast for the full year was cut, but the quarterly GDP forecast was raised.
Inflation & Interest Rates
The MPC has retained its forecast for headline inflation (the total inflation in an economy) in financial year 2022-23 at 6.7%. The RBI expects headline inflation to remain above 6% for 15 consecutive months. Even then, reaching the 4% level may take some time.
Repo Rate
The MPC has raised the repo rate by 35 basis points (bps) to 6.25%. Simultaneously, the Standing Deposit Facility was increased to 6%.
The Monetary Policy Framework
Introduced in May 2016, the Monetary Policy Framework was enacted to provide the RBI with legislative mandate to operate the country’s monetary policy. The framework aims at setting the policy (repo) rate based on an evaluation of the current and evolving macroeconomic situation, modulating liquidity conditions to anchor money market rates at or around the repo rate.
Monetary Policy Committee (MPC)
Under Section 45ZB of the amended RBI Act, 1934, the central government has the power to establish a six-member Monetary Policy Committee (MPC). The MPC’s objective is to determine the Policy Rate required to reach the inflation target.
Instruments of Monetary Policy
Several tools assist in the crafting and implementation of monetary policy. These include the Repo Rate, Standing Deposit Facility (SDF) Rate, Marginal Standing Facility (MSF) Rate, Liquidity Adjustment Facility (LAF), LAF Corridor, Main Liquidity Management Tool, Fine Tuning Operations, Reverse Repo Rate, Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Open Market Operations (OMOs).
Impact of Monetary Policy on Civil Services Examination
Understanding monetary policy and its role is crucial for civil services aspirants. Previous year questions have touched upon aspects like expansionist monetary policy and its components. For example, in 2020, one question asked about which actions the RBI wouldn’t undertake under an expansionist monetary policy. Further, in 2019, a mains question focused on whether steady GDP growth and low inflation indicate a healthy economy.
