Budget’s Focus on Agriculture is a positive for Inflation: RBI

Sub: Eco

Sec: Monetary Policy

Why in News?

RBI Governor Sanjay Malhotra emphasized that the Budget’s focus on vegetables, fruits, and pulses will help control inflation.
Inflation is declining, allowing RBI to support growth while maintaining a neutral stance.

Context:

RBI is to support growth and manage inflation. In this regard, following are the key highlights: –

Growth vs. Inflation

RBI’s dual mandate: Ensure price stability while supporting economic growth.
Inflation is expected to decline further, allowing a more growth-friendly monetary policy.

Rupee Depreciation & Global Uncertainty

Rupee depreciation impacts inflation, but global uncertainties (trade wars, financial volatility) are a bigger concern.
RBI does not target a fixed exchange rate, but intervenes to prevent excessive volatility.

Budget’s Role in Inflation Control

Food accounts for 46% of CPI basket, making agricultural measures crucial for inflation control. For Pulses – Mission launched to boost production, address the inflation spikes.

Can India Achieve 7%+ growth?

RBI believes 7%+ GDP growth is achievable.
RBI’s repo rate cut + Budget measures create a favourable environment for economic expansion.

Key Regulatory Initiatives undertaken by RBI

Cross-border card deals to carry Additional Factor of Authentication facility
Working group to review trading and settlements timings of RBI- regulated financial markets
Home loans linked to EBLR (external benchmak lending rate) to be cheaper now, those linked to MCLR (Marginal cost of funds-based lending rate) to see effect in 6 months
Launch of forward contracts in Govt. securities mulled.
External Benchmark Lending Rate (EBLR): Introduced by the RBI in October 2019, banks link lending rates to an external benchmark like the RBI Repo Rate, 3-month T-Bill yield, etc.
Ensures faster transmission of rate cuts to borrowers.
Marginal Cost of Funds-based Lending Rate (MCLR): Introduced in April 2016, MCLR is based on a bank’s marginal cost of funds, operating costs, and a tenure premium. It replaced the Base Rate system but had slower rate transmission than EBLR.
Base Rate: The minimum interest rate set by banks before April 2016, below which they could not lend. It was determined by factors like cost of funds, profitability, and regulatory requirements.
Benchmark Prime Lending Rate (BPLR): Used before the Base Rate (pre-2010), where banks set their own prime lending rates. It was not transparent, leading to its gradual phase-out.