From UPSC perspective, the following things are important :
Prelims level: Banking; RBI; The Monetary Policy Committee (MPC);
Mains level: Banking; RBI; Functions of the RBI;
Why in the news?
Recently, the Monetary Policy Committee (MPC), which met here from April 3 to 5, decided to keep the repo rate unchanged at 6.5% and maintain the policy stance of ‘withdrawal of accommodation’ in the monetary policy.
- Withdrawal of accommodation means reducing the money supply in the system which will rein in inflation further. (Temporary Provision)
Why the RBI has been wary of declaring an early victory over inflation?
- Persistent Food Inflation: Despite expectations of moderation in inflation, food inflation has remained a concern, especially due to the high prices of food grains and vegetables. In February, food inflation was at 8.7%, with foodgrain inflation still high at 9.8%.
- Inflation Gap between Bottom and Top of Urban Population: Food inflation disproportionately affects lower-income deciles more than higher ones. In February, the bottom 20% of the urban population faced 5.5% inflation compared to 4.7% for the top 20%. This pattern is similar in rural areas as well.
- Management Issues: The RBI faces challenges in managing inflation while maintaining growth, especially when inflation persists due to Geopolitical conditions. While central bank policy moves cannot directly bring down supply shock-driven inflation, they can prevent high prices from spilling over.
Why RBI has kept policy rates unchanged?
- High Economic Growth: The RBI is focused on maintaining price and financial stability to sustain high growth. The central bank expects the Indian economy to grow at 7% in fiscal year 2024-25
- Benign Core Inflation: Benign core inflation, which has declined steadily over the past months, indicates that strong growth has not been inflationary. The RBI finds comfort in the declining core inflation levels
- Monetary Policy Stance associated with food inflation: The RBI is likely to maintain policy rates until October 2024 to assess evolving risks associated with food inflation. The central bank is cautious and prefers to adopt a risk-minimization mode to align inflation towards the target while supporting growth
- Global Economic Conditions: The RBI is monitoring global economic trends and external factors that could impact domestic inflation and growth. The central bank is aware of the risks posed by geopolitical tensions, volatility in international financial markets, and geo-economic fragmentation
BACK2BASICSThe Monetary Policy Committee (MPC)
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Conclusion: The RBI has been cautious due to persistent food inflation impacting lower income groups, challenges in managing it, and the need to assess evolving risks. MPC’s unchanged policy rates reflect this caution amidst high growth and benign core inflation.
Mains pyq
Q Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC IAS/2019)
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