Pause and effect – Recent decision of the Reserve Bank of India’s Monetary Policy Committee (MPC) | 8th April 2023 | UPSC Daily Editorial Analysis

What's the article about?

• It talks about the recent decision of the Reserve Bank of India’s Monetary Policy Committee (MPC) to take a pause and keep the repo rate unchanged.

Relevance:

• GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment;
• Prelims

Context:

• After raising the repo rate in six consecutive policies, the Reserve Bank of India (RBI), in the recent MPC Meeting, decided to pause its rate hike cycle amid rising concerns over global financial stability.
• The decision to keep the repo rate unchanged was taken unanimously by all the six Monetary Policy Committee (MPC) members even as inflation continues to remain above the tolerance band of 2-6 per cent.
• The RBI’s move will give a breather to borrowers as their lending rates, which are linked to repo rate, will not increase.
  • The MPC’s decision to pause will give relief to borrowers as the external benchmark based lending rate (EBLR), which is linked to repo rate, will not increase.
• The RBI’s status quo comes at a time when other major central banks have raised interest rates, as they remain cautious over the global banking crisis.
  • Last month, the European Central Bank and US Federal Reserve raised their interest rates by 50 bps and 25 bps respectively.
• Since May 2022, the monetary policy committee has met six times.
  • At three of these meetings, the members voted unanimously for a rate action.
  • In the May 2022 meeting, the six-member committee voted unanimously for a 40 bps hike in repo rate.
  • In June 2022, all the members voted for a 50 bps increase in the repo rate. And today, the six MPC members voted for a pause.

Analysis:

• Clearly, developments in the global financial system, particularly the banking sector turmoil and the volatility and uncertainty they have triggered, have weighed heavily on policymakers’ decision to wait and watch.
• Notwithstanding RBI Governor’s assertions that India’s ‘banking and non-banking financial service sectors remain healthy and economic activity remains resilient’, it is the spectre of rising credit costs posing risks to both consumption demand and private investment that was a key factor in the World Bank’s calculus earlier this week, when it cut India’s 2023-24 growth forecast to 6.3%.
• With the global economy still facing headwinds including from unabated geopolitical tensions, which the World Bank warned could result in a recession were more shocks to occur, the RBI’s policymakers have judiciously chosen to subordinate their concerns over inflation, for now, so as to ensure the growth momentum is not undermined.
• Still, monetary authorities have only a small window in which to see if their prognostication of a moderation in inflation is indeed starting to pan out.
• With the Governor acknowledging that core inflation remains elevated across a range of goods and services and unyielding, the MPC faces a challenge in its mandate of achieving durable disinflation.
• As the RBI’s latest Monetary Policy Report notes, upside risks to the inflation outlook emanate from factors including higher global crude and commodity prices and extreme weather conditions and deficient monsoon rains.

Way Forward:

• The sudden recent announcement of an output cut by OPEC+ producers had resulted in a jump in crude prices, which could well upset the RBI’s assumption of crude averaging $85 a barrel (for the Indian basket) this year.
• Similarly, the outlook for food prices too is beset with uncertainty given the unseasonal rains in parts of the country combined with the likelihood of an El Niño, which could raise summer temperatures and depress monsoon rainfall.
• Policymakers must remember, as the RBI chief so pithily said, price stability still remains “the best guarantee for sustainable growth”.