Monetary Policy Statement

Monetary Policy Statement

What is in the News ?

• In a surprise move that went against the street expectations of a 25 basis points rate hike, the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 6.5 per cent amid concerns over the global banking crisis.

Monetary Policy Stance

• The decision to keep the repo rate unchanged was taken unanimously by the six-member Monetary Policy Committee (MPC).
• The MPC decided by a majority of five out of six members, to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Reasons for Pause

• Global Conditions : The RBI underlined risks from protracted geopolitical tensions, tight global financial conditions and global financial market volatility to its monetary policy outlook.
• Dampening Domestic Demand : Concerns over slowing consumption and tepid private investment have been emerging in policy quarters, with many seeing high interest rates as a crucial factor in dampening demand. The pause by the RBI will help favour the growth-inflation trade-off towards the former.
• Positive Real Interest Rates : In February, after the RBI’s central board meeting, RBI Governor Shaktikanta Das had justified the rate hikes saying that the real interest rates had just turned positive after being in the negative territory for the last three years. Negative Real Interest Rates for prolonged period “can create instability in the financial system”.
• Government’s Stance : The government has been leaning in favour of a benign pace of rate hikes by the RBI, citing the need for a de-linking of monetary policy stance from that of central banks of developed economies

Rate Hikes So Far !!!

• In February, the RBI raised the repo rate by 25 basis points to 6.5 per cent.
• The MPC hiked the repo rate by 35 bps in December 2022.

RBI’s Projections

• The RBI has projected real GDP growth for 2023-24 at 6.5 per cent. This is higher than the forecast of 6.4 per cent made in the February 2023 policy.

Read about Inflation and Economic growth of 2023, click here

Practice Questions for Prelims

 Consider the following statements :
1. Higher inflation has the potential to reduce real interest rates.
2. Lower real interest rates discourages credit creation by banks.
3. Tight monetary policy is a step towards fighting the problem of negative real interest rates.

Which of the above statements is/are correct ?
a) 1 and 2only
b) 2 and 3only
c) 1 and 3only
d) 1,2 and 3

ans. d)

Mains Practice Question

RBI’s monetary policy which is based on inflation targeting needs reform. Comment.

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