RBI hikes Repo rate by 25 bps

Subject: Economy

Section: Monetary Policy

Concept:

In its first Monetary Policy statement of 2023, the RBI hiked the policy repo rate by 25 basis points to 6.5%.
Repo rate is the rate at which the RBI lends money to banks to meet their short-term funding needs.
The decision to raise the repo rate was approved by a 4: 2 majority by the central bank’s Monetary Policy Committee (MPC).
The hike so far :
The RBI has increased the repo rate by a cumulative 250 basis points to 6.50 per cent since May 2022.
Present hike was the sixth straight hike to the repo rate, which, in December 2022, was raised by 35 basis points to 6.25%.
Inflation forecast:
The central bank has lowered the inflation target for FY23 from 6.7 per cent to 6.5 per cent – which is still above the RBI’s comfort level of four percent. Inflation is expected to be 5.3 percent in FY24.
Inflation for Q4 of FY23 at 5.7 percent as against 5.9 percent.

Monetary Policy Committee

The Monetary Policy Committee (MPC) is a committee of the RBI, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
The RBI Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC to bring more transparency and accountability in fixing India’s Monetary Policy.
The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.
The policy is published after every meeting with each member explaining his opinions.
The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
Suggestions for setting up a Monetary policy committee is not new and goes back to 2002 when YV Reddy committee proposed to establish an MPC, then Tarapore committee in 2006, Percy Mistry committee in 2007, Raghuram Rajan committee in 2009 and then Urjit Patel Committee in 2013.

Composition and Working

The committee comprises six members – three officials of the RBI and three external members nominated by the Government of India.
The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
The Governor of RBI is the chairperson ex officio of the committee.
Decisions are taken by a majority with the Governor having the casting vote in case of a tie.
They need to observe a “silent period” seven days before and after the rate decision for “utmost confidentiality”.

Instruments of monetary policy are of two types:

Quantitative Instruments: General or indirect (Cash Reserve Ratio, Statutory Liquidity Ratio, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate, Marginal standing facility and Liquidity Adjustment Facility (LAF))
Qualitative Instruments: Selective or direct (change in the margin money, direct action, moral suasion).