RBI Holds Rate at 6.5% and Shifts Policy Stance to ‘Neutral’

RBI Holds Rate at 6.5% and Shifts Policy Stance to ‘Neutral’

Sub : Eco

Sec: Monetary Policy

RBI Maintains Benchmark Rate:

• The Reserve Bank of India (RBI) has held the benchmark interest rate at 6.5% for the 10th consecutive monetary policy review since April 2023.
• This decision indicates stability in monetary policy while opening the possibility for a rate cut in the near future.
• Shift to ‘Neutral’ Stance:
  • The Monetary Policy Committee (MPC), after a three-day meeting starting October 7, unanimously shifted its policy stance from ‘withdrawal of accommodation’ to ‘neutral’.
  • Five out of six members voted to maintain the interest rates, while the shift to a neutral stance was unanimous.
  • This shift signals that the RBI is ready to respond flexibly to future changes in economic conditions, particularly inflation and growth.
• Inflation and Growth:
  • Inflation and growth parameters are currently well-balanced, according to the MPC.
  • Retail inflation was close to the RBI’s target of 4% in July and August.
  • Governor Shaktikanta Das mentioned that inflation is expected to reverse in September and may remain elevated due to adverse base effects.
  • The RBI’s GDP growth projection remains at 7.2%, and inflation is estimated at 4.5% for 2024-25. However, second-quarter inflation is revised to 4.1%, with a projection of 4.8% for the October-December quarter.
• Inflation Management:
  • Das used an analogy, stating that “the inflation horse has been brought to the stable,” emphasizing the importance of controlling inflation and preventing it from rising again.
  • He stressed the need to keep inflation under control and monitor evolving conditions to confirm disinflationary impulses.
• Key Risks:
  • The MPC noted unanticipated weather events and geopolitical conflicts as major risks that could push inflation upward.
  • The committee remains watchful of the evolving inflation outlook in the coming months.

By maintaining the status quo on rates but moving to a neutral stance, the RBI is signaling a balanced approach toward fostering sustainable growth while keeping inflation within control.

Monetary Policy Committee (MPC) – Overview:

The Monetary Policy Committee (MPC) is a statutory body established to determine India’s benchmark interest rates, particularly the repo rate, to control inflation and stabilize the economy. It was created as part of a larger framework to introduce inflation-targeting monetary policy.

Key Details:

• Constitution:
  • The MPC was constituted under Section 45ZB of the RBI Act, 1934, amended by the Finance Act, 2016.
  • The MPC was established after a Memorandum of Understanding between the Government of India and the Reserve Bank of India (RBI).
• Function:
  • The MPC is responsible for fixing the benchmark policy rate (repo rate) to control inflation and ensure price stability.
  • The inflation target is set by the Government of India in consultation with the RBI.
• Composition:
• The MPC consists of 6 members:
  • RBI Governor (Chairperson).
  • RBI Deputy Governor in charge of monetary policy.
  • One member nominated by the RBI Board.
  • Three members nominated by the Government of India.
  • The external members nominated by the government serve for a period of four years.
  • The decisions are made based on a majority vote, with each member having one vote. In case of a tie, the RBI Governor holds a casting vote.
• Quorum:
  • The quorum for the MPC’s meeting is four members, and one of them must be either the Governor or the Deputy Governor of the RBI.
• Binding Decisions:
  • The decisions made by the MPC are binding on the RBI.
  • RBI’s Monetary Policy Department (MPD) assists the MPC by providing technical analysis and policy advice.
• Replacement of the Technical Advisory Committee:
  • The MPC replaced the earlier Technical Advisory Committee (TAC), where the RBI Governor had discretion to seek the opinion of a group of advisors before making a monetary policy decision. The MPC formalized and institutionalized this process by granting decision-making authority to the Committee.

The MPC plays a crucial role in shaping India’s monetary policy, contributing to economic stability, influencing borrowing costs, and maintaining price stability, which impacts investments, savings, and consumption in the economy.

Summary of Policy Stances