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What's the article about?
- It talks about the outcomes of the recent meetings of the Monetary Policy Committee (MPC).
Relevance:
- GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment;
- Prelims
Context:
- In its first meeting of this calendar year, the MPC of the RBI hiked the key benchmark policy rate by 25 basis points to 6.5 per cent, citing sticky core inflation.
- This is the sixth time interest rate has been hiked by the MPC since May last year, taking the total quantum of hike to 250 basis points.
- Alongside, the committee has also retained its stance, deciding to remain focused on withdrawal of accommodation. The tone of the policy was decidedly hawkish.
What is the Monetary Policy Committee (MPC)?
- It is a statutory body. The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC.
- Its main task is to maintain price stability, while keeping in mind the objective of growth.
- It determines the policy interest rate (repo rate) required to achieve the inflation target of 4% with a leeway of 2% points on either side.
- The Governor of RBI is ex-officio Chairman of the MPC.
What is Repo Rate?
- Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security.
- Repo rate is also known as the Policy Rate.
Stances of MPC:
- The MPC indicates its broader policy approach by guiding the markets with policy stances, They are as follows:
- Accommodative:
- An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth. The central bank, during an accommodative policy period, is willing to cut the interest rates.
- Neutral Stance:
- A ‘neutral stance’ suggests that the central bank can either cut rate or increase rate.
- This stance is typically adopted when the policy priority is equal on both inflation and growth.
- During neutral policy, the central bank doesn’t commit to hike rates or cut.
- Hawkish Stance:
- A hawkish stance indicates that the central bank’s top priority is to keep the inflation low.
- During such a phase, the central bank is willing to hike interest rates to curb money supply and thus reduce the demand. A hawkish policy also indicates tight monetary policy.
- Calibrated Tightening:
- Calibrated tightening means during the current rate cycle, a cut in the repo rate is off the table.
- But, the rate hike will happen in a calibrated manner. This means the central bank may not go for a rate increase in every policy meeting but the overall policy stance is tilted towards a rate hike.
Analysis:
- On inflation:
- Recent data does signal that retail inflation has begun to ease.
- Inflation, as measured by the consumer price index, was below the upper threshold of the central bank’s inflation targeting framework for the last two consecutive months.
- However, much of the decline was driven by a fall in food inflation, especially vegetables.
- However, core inflation continues to remain a source of concern: It remains elevated, signalling that price pressures are fairly broad-based.
- Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors.
- This measure of inflation excludes these items because their prices are much more volatile.
- On growth:
- The RBI is optimistic in its assessment.
- It expects the Indian economy to grow at 6.4 per cent in 2023-24.
- While this is broadly in line with expectations of the Economic Survey, projections by independent analysts suggest that the economy is likely to grow at a slower pace.
Way Forward:
- Considering that the effects of monetary policy are felt with a lag, the committee should now assess the impact of the cumulative hikes so far on inflation and the economy.
- As the Governor’s statement notes, the rate hikes since May 2022 continue to work their way through the system.
