MONETARY POLICY COMMITTEE (MPC)

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Recently, the Reserve Bank of India (RBI) in its Monetary Policy Committee (MPC) Review announced a 50-basis point hike in the repo rates thereby taking the cumulative rate hike over the last three months to 140 basis points. 

Policy Repo Rate: 5.40%

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security.

Standing Deposit Facility (SDF): 5.15%

• The SDF is a liquidity window through which the RBI will give banks an option to park excess liquidity with it.
• It is different from the reverse repo facility in that it does not require banks to provide collateral while parking funds.

Marginal Standing Facility Rate: 5.65%

• MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely.
• Under interbank lending, banks lend funds to one another for a specified term.

Bank Rate: 5.65%

• It is the rate charged by the RBI for lending funds to commercial banks.
• Cash Reserve Ratio (CRR): 4.50%
• Under CRR, the commercial banks have to hold a certain minimum amount of deposit (NDTL) as reserves with the central bank.

Statutory Liquidity Ratio (SLR): 18.00%

SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. 

Inflation Projection for 2022-23: 6.7%

• Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.
• Even as the consumer price inflation has eased from its surge in April 2022, it is expected to remain uncomfortably high and above the upper threshold (6%) of the target.
• These elevated levels of inflation remained the key concern for the MPC as the inflation target of Government of India according to RBI is (4%+/- 2%)
• It is expected that Inflation would remain above the Upper Threshold (6 %), in Q2 and Q3 (FY 2022-23).
• This sustained high inflation may destabilise inflation expectations and harm growth in the medium term.
• The withdrawal of Monetary Accommodation (Expanding money Supply) or increasing Rates can keep inflation expectations in range and contain the Second-Round Effects of Inflation.
• Second-round effects occur when inflation passes to impact the wage and price setting, leading to a wage-price spiral.

Monetary Policy Framework

• In May 2016, the RBI Act was amended to provide a legislative mandate to the central bank to operate the country’s monetary policy framework.
• The framework aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation, and modulation of liquidity conditions to anchor money market rates at or around the repo rate.
• Reason for Repo Rate as Policy Rate: Repo rate changes transmit through the money market to the entire financial system, which, in turn, influences aggregate demand.
• Thus, it is a key determinant of inflation and growth.

Monetary Policy Committee

• Under Section 45ZB of the amended (in 2016) RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
• Further, Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”.
• The decision of the Monetary Policy Committee shall be binding on the Bank.

SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT