Central Idea

This article discusses the recent policy review by the MPC (Monetary Policy Committee) and its implications for India’s economy.
The MPC is responsible for making decisions regarding the repo rate and determining the policy stance to achieve specific economic objectives.

Key highlights by RBI

Repo Rate: Kept unchanged at 6.50%
Standing Deposit Facility (SDF) Rate: Remains unchanged at 6.25%
Marginal Standing Facility (MSF) Rate and Bank Rate: Unchanged at 6.75%
Target Inflation: Medium-term target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2%

RBI Monetary Policy Committee
Purpose	Make decisions on monetary policy in India
Constituted by	RBI Act, 1934
Objective	Maintain price stability and foster economic growth
Members	3 officials from the RBI, 3 external members appointed by the Government of India
Chairperson	Governor of the RBI
Decision Factors	Economic and financial developments Inflation trends Macroeconomic conditions
Key Tools	Policy interest rate (Repo rate) Policy stance
Impact of Decisions	Borrowing costs Liquidity in the banking system Overall economic environment

	Description
Repo Rate	Rate at which the central bank lends money to commercial banks
Reverse Repo Rate	Rate at which the central bank borrows money from commercial banks
Cash Reserve Ratio (CRR)	Portion of banks’ deposits that they must hold as reserves with the central bank
Statutory Liquidity Ratio (SLR)	Percentage of certain assets that banks are required to maintain in their portfolio
Open Market Operations (OMOs)	Buying and selling of government securities by the central bank in the open market
Marginal Standing Facility (MSF)	Facility allowing banks to borrow funds overnight from the central bank against eligible securities
Liquidity Adjustment Facility (LAF)	Repo and reverse repo rates used by banks to manage their liquidity needs
Policy Stance and Communication	MPC’s approach to monetary policy and communication of decisions and outlook

GDP growth and inflation forecasts: GDP growth forecasts provide insights into the expected pace of economic expansion, while inflation forecasts help gauge price stability and purchasing power.
Stability of forecasts: The MPC’s latest review indicates relatively little change in the GDP growth and inflation forecasts, reflecting a consistent outlook for the economy.
Goldilocks metaphor for the economy: The reference to a Goldilocks moment alludes to an ideal state where the economy operates optimally, striking a balance between high inflation (too hot) and faltering GDP growth (too cold). RBI surveys on consumer confidence and inflation expectations suggest a positive and favourable economic environment.

Surprising GDP growth: India’s GDP growth in FY23 exceeded the RBI’s expectations, reaching 7.2% instead of the projected 7%.
Decrease in headline retail inflation: Retail inflation dropped to 4.7% in April, marking the lowest reading since November 2021.
Consumption recovery and private investments: The anticipation of a robust Rabi crop production and a normal monsoon, combined with the government’s emphasis on capital expenditure, suggests a potential increase in consumption levels and private investments.
Increase in consumer confidence: Consumer confidence is gradually improving, while Indian families expect inflation to stabilize at a more manageable level.

Expected deceleration in GDP: Despite positive indicators, the MPC anticipates a slowdown in GDP growth from 7.2% to 6.5% in FY24, with professional forecasters projecting an even lower growth rate of 6%.
Consumer confidence still in negative territory: While consumer confidence metrics show improvement, they remain below the 100 mark, indicating prevailing pessimism among the public.
Headwinds and potentially economic challenges: Various factors, including weak global demand, volatility in global financial markets, geopolitical tensions, and the potential impact of El Nino on the monsoon, pose potential risks to India’s economy.