Monetary Policy Committee (MPC)
Highlights–
- The six member Monetary Policy Committee of RBI began meeting on Monday to discuss India’s monetary policy stance until the next assessment cycle.
- The decision of MPC is important because an increase in the repo rate might mean increased EMIs for Car or Home loans.
- The RBI is required by law to ensure that the inflation rate remains at 4%, with the leeway of + or – 2%.
- RBI is currently in the dock because inflation has been more than 6% since the beginning of 2022.
- Raising interest rates (Repo Rate) incentivises people to keep their money in the bank or other saving instruments because that would now earn more interest. At the same time, higher interest rates disincentivise new borrowings for purchase or investment.
- Together, these above two are expected to slow down economic activity. As demand for things fall, the inflation rates too will subside.
- Also, while food and fuel price inflation is expected to moderate significantly in the coming days, a long period of high inflation has meant that non-food and non-fuel inflation- called core inflation, too has crossed 6%.
- MPC will decide by split vote weather to raise repo rate further. However, if rates are raised it will negatively impact India’s economic growth.
What is Inflation?
Inflation is defined as the average change in the price of a basket of goods and services over time. It is measured by two indices in India, Consumer Price Index (CPI) and Wholesale Price Index (WPI).
CPI measures inflation at the retail level i.e. price paid by consumers. Services are included in the CPI. The base year for CPI is 2012. It is published by National Statistical Office (NSO), Ministry of Statistics and Programme Implementation
WPI reflects changes in average wholesale prices for goods sold in bulk. Services are not included in the WPI. The base year for WPI is 2011-12. It is published by Office of Economic Advisor, Ministry of Commerce & Industry.
(Credits – Kalkine Image)
What is repo rate, reverse repo rate and bank rate?
Repo Rate– It is the interest rate at which the central bank of a country lends money to commercial banks. If repo rate goes up, banks charge customers and businesses a higher interest rate.
Reverse Repo Rate– It is the rate at which banks earn interest when they park surplus funds with the RBI. The repo rate set by the RBI is always higher than the reverse repo rate.
Bank Rate– It is the interest rate at which the central bank of a country lends money to commercial banks, however, no collateral is involved in bank rate (While in Repo rate RBI purchases securities from banks while giving loan). Repo Rate is always lower than the Bank Rate.
What are the functions of the RBI?
Monetary Authority:
- Formulates, implements and monitors the monetary policy.
- Objective: maintaining price stability while keeping in mind the objective of growth.
Regulator and supervisor of the financial system:
- Prescribes broad parameters of banking operations within which the country’s banking and financial system functions.
- Objective: maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public.
Manager of Foreign Exchange
- Manages the Foreign Exchange Management Act, 1999.
- Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency:
- Issues, exchanges and destroys currency notes as well as puts into circulation coins minted by Government of India.
- Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
Developmental role
- Performs a wide range of promotional functions to support national objectives.
Regulator and Supervisor of Payment and Settlement Systems:
- Introduces and upgrades safe and efficient modes of payment systems in the country to meet the requirements of the public at large.
- Objective: maintain public confidence in payment and settlement system
Related Functions
- Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
- Banker to banks: maintains banking accounts of all scheduled banks.
Way Forward- Growth concerns need to be adequately factored into, while going for increasing key policy rates.
Source- Indian Express
NEWS– As Monetary Policy Committee (MPC) meets to decide interest rate, snapshots of inflation growth
Syllabus– Prelims; Mains; Monetary Policy; RBI
