Monetary Policy Committee Notifications

Monetary Policy Committee Notifications

[op-ed snap] Operation Twistop-ed snap


From UPSC perspective, the following things are important :

Prelims level : OMO

Mains level : OMO - effectiveness


The Reserve Bank of India announced its decision to conduct simultaneous purchase and sale of government securities for Rs 10,000 crore each, under Open Market Operations (OMO). 

The need of the hour

  • This is done after a review of the current liquidity, market situation and evolving financial conditions.
  • Similar to past US experiments – Financial markets perceive this as an Indian variant of Operation Twist. This is said to be similar to the asset purchase programme kicked off by the Kennedy administration in the US in 1961 and later in 2011 by the US Federal Reserve to help lower long-term interest rates.


  • It is an instrument of monetary policy aimed at either withdrawing liquidity or boosting it, including during periods of robust capital flows.
  • Objective – The aim is to influence long-term interest rates and also to provide a boost to the economy by making the cost of capital or funds cheaper for business and industry and other borrowers.
  • Such programmes were launched in the US first during a recession and later during a prolonged slowdown.
  • Reason – Even after aggressively cutting its policy rate by 135 basis points this year, monetary policy transmission has been weak. Banks are not lowering rates significantly given the state of their balance sheets.
  • Need for complementary support – for such a programme to have an impact, there should be a well functioning market for government securities with depth. 
  • Poor financial sector – the link between India’s bond market and the real economy has been relatively weak and making it worse is a half functional financial sector now.
  • Fiscal performance – the large fiscal slippage — the fiscal deficit at the end of April-October this year at above 100% of the budgeted target — the spike in inflation and toned down projections of GDP growth. 
  • Lessons from the US experience – a programme aimed at reducing long-term bond yields will only have limited impact as long as the government runs a large deficit.

Way ahead

  • There is a growing recognition that central banks are running out of ammunition. 
  • The government should get to work on a credible fiscal deficit reduction plan.
  • It should fix the broken financial system along with unveiling a roadmap for state-owned banks.
  • The divestment programme should get going.
  • The packages for sectoral issues, especially real estate, should be operationalised swiftly.


Open Market Operations

Economics | Monetary Policy Explained with Examples

Monetary Policy Committee Notifications

[op-ed snap] Trouble with creditop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Slowdown of credit in the economy


The Monetary Policy Report of the RBI paints a worrying picture of credit flows in the economy. 

Status of credit flows

  • Between April and mid-September this year, the flow of funds to the commercial sector collapsed to Rs 90,995 crore, down from Rs 7.36 lakh crore over the same period last year. 
  • Non-food bank credit has declined
  • Flows from NBFCs have declined. 
  • Foreign flows have picked up during this period. 
  • Typically, credit flows in the first half of the year tend to be subdued and pick up in the second half. The decline this time around compared to the previous year is staggering.

Reasons behind this decline

    • It appears to be due to a combination of two factors 
      • a collapse in demand
      • risk aversion

Corporate investments

    • An over-leveraged corporate sector is in the midst of a much needed deleveraging exercise. 
    • In the current environment of subdued demand and low capacity utilisation rates, there is little incentive to launch fresh investments.


    • On the other hand, banks appear to be reluctant to cut rates to boost lending.
    • They are parking more funds in government securities and with the RBI.
    • RBI report notes that banks have increased their SLR portfolios, holding excess SLR of 6.9% at the end of August 2019 indicating a reluctance to lend.
    • In the face of growing economic uncertainty, banks have tightened credit norms, reducing those eligible for credit.
    • The shift in the liquidity stance from deficit to surplus mode has also not helped boost credit flow to the larger economy. 

Crisis in the NBFC 

      • This has only deepened. 
      • Bank credit and the commercial paper market remains shut for NBFCs.
      • Credit flow from NBFCs to the larger economy has suffered and the fallout is visible in the decline in household debt fueled consumption.


  • A slowdown in economic activity will increase stress on the repayment capacity of borrowers and increase the rise of default, making lenders even more cautious. 
  • The first step towards rebuilding trust, and addressing the stress in the financial sector in order to get credit flowing, should be to ensure a quick and orderly resolution of stressed NBFCs.
Monetary Policy Committee Notifications

[op-ed snap] A welcome move, but it’s unlikely to spur demandop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Monetary policy rate cut


With the 25 basis points (bps) rate cut, RBI returned to the conventional wisdom of a rate change in multiples of 25bps.

RBI statement

    • MPC decided to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target.
    • RBI’s decision to increase the household income limit for borrowers of NBFCs and MFIs is welcome. It will enhance credit delivery to a larger customer base at the bottom of the pyramid.
    • There is an attempt to boost the domestic forex derivatives market. RBI has decided to allow domestic banks to offer foreign exchange prices to non-residents on a 24-hour basis. 

Efficacy of rate cuts

    • This may push the debt markets to take a cue from the second-generation policy signals and yields may soften from the current level.
    • Efficacy of rate cuts is questionable against elevated household leverage, deteriorating company fundamentals, and weak demand
    • The number of downgrades in H1FY20 grew by 66% vis-à-vis a 20% de-growth for the number of upgrades. The pace of downgrades has been increasing. 
    • Financial flows to the commercial sector in H1FY20 are significantly lower due to a decline in funding from banks and non-bank sources. 
    • Despite a rising interest scenario, credit had expanded by over ₹1.65 trillion but contracted by ₹93,700 crores even as we are in an aggressive rate cut cycle. This indicates credit risk aversion continues to play center stage for the non-bank sector.

Fiscal policy

    • Centre has done a remarkable job in maintaining fiscal consolidation.
    • We are increasingly concerned about the fiscal position of the states. 

Way ahead

    • More clarity is needed to crystallize the KYC requirements for off-shore entities as also their tax implications.
    • In the current context, an only monetary policy rate cut would not work in isolation. It must be complemented by fiscal expansion.


Foreign exchange derivative

A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rate of two currencies.

Monetary Policy Committee Notifications

[op-ed snap] Fiscal wheels must also roll in order to make monetary policy effectiveop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Monetary policy transmission


Through four successive reductions in this calendar year, RBI has reduced the repo rate by 110 basis points to 5.4%.

Status of the rate cut

  1. The economy has been slow to respond to these incremental monetary stimuli. 
  2. Quarterly growth data show a continuing slowdown, mainly driven by sluggish demand, due to both external and domestic factors.
  3. There is substantial excess capacity in the manufacturing sector.
  4. With unutilized capacity, temporary and casual employees are being laid off and wage hikes are being postponed, reducing levels of aggregate disposable income, which is further reducing demand, particularly for consumer durables.
  5. Unless capacity utilization improves, investment demand from the private sector is not likely to improve. 

Repo rate reductions only provide enabling conditions to reduce the cost of borrowing. To be effective, adequate transmission needs to take place.

Limitations of Monetary Policy

  1. Demand for investment and consumer durables has to increase, which is a function of income, much more than the cost of borrowing. For this, momentum has to be generated at the fiscal side.
  2. Due to revenue constraints and legislative limits on borrowing, suitable countercyclical fiscal measures have not yet been taken.
  3. Public sector investment has been showing signs of stagnation for some time. The central government’s capital expenditure to GDP has stagnated at 1.6% for 2018-19 and 2019-20 as budgeted.
  4. Without a demand push from the public sector, monetary policy alone would not be effective.

What the government should do

  1. The countercyclical policy is primarily the responsibility of the central government. 
  2. A one-year departure from the budgeted fiscal deficit of 3.3% of GDP for 2019-20 can be justified at the current juncture.
  3. It should be ensured that the entire additional borrowing above the budgeted level is spent on capital expenditure.
  4. It is established fact that increases in government capital expenditures have much larger multiplier effects, as compared to increases in government revenue expenditures.
  5. State governments and the central and state public enterprises should come on board and undertake additional investment spending on infrastructure.
  6. This will push investment from the private sector, uplifting the infrastructure and construction sectors, and later spreading out to other sectors.
  7. This will trigger a virtuous cycle focused on the employment-intensive infrastructure and construction sectors -> private disposable incomes would increase -> reversing the ongoing demand slow down.
  8. As the magnitude of private borrowing grows, the transmission would improve.

Together, the joint impact of the fiscal and monetary stimuli is expected to uplift the country’s growth from its present low level to levels comfortably above 7% and, eventually, closer to 8.5-9%. Sustaining growth at these levels is required if India were to become a $5-trillion economy by the end of FY25.

Monetary Policy Committee Notifications

[op-ed snap] The capital adequacy norms for banks could do with revisionop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Problems with monetary policy transmission


The monetary policy committee of RBI will announce its monetary policy decision. RBI is widely expected to cut rates.

Challenges in Monetary policy transmission

  1. Irrespective of the magnitude of a rate cut, the question of transmission is a big one.
  2. Interest rate cuts take much longer to be passed on.
  3. It is not even clear if interest rates matter in the current uncertain environment. 

Risk weights

  1. In the credit boom years up to 2007, RBI had proactively adjusted risk weights to dissuade banks from lending excessively to certain sectors and businesses.

Why reverse now

  1. According to data published by the Bank for International Settlements (BIS), India’s credit-to-GDP gap has been negative since 2013 and is now running well below trend.
  2. Banks are unwilling to lend and businesses are not keen to borrow either. The caution of banks should not starve creditworthy borrowers.
  3. In the post-2008 phase, regulators around the world have embraced counter-cyclical capital buffers and macroprudential norms to better regulate credit creation while interest rates hit new lows. RBI could use the mechanism of countercyclical capital buffers to ease credit conditions.
  4. Act in concert with owners of banks in enforcing lending discipline.
  5. Central bank prescribing the MCLR-based lending rate as the floor in a liberalized interest rate environment is incongruous.
  6. The government must use the crisis to legally enshrine non-interference in the operational decisions of banks
  7. The government must incentivize banks to augment their assessment of creditworthiness and risk assessment of loans on a continuous basis.
  8. Capitalization support and operational autonomy must be made contingent on skill up-gradation and other quantifiable performance measures.
  9. As economic conditions normalize, countercyclical capital buffers must and will move in the opposite direction.
  10. The bigger question is whether the capital adequacy norms prescribed under Basel III should be made uniformly applicable to all banks in India or only to internationally active banks. It will not only reduce the capitalization burden on the government but will also free up lending capacity.
Monetary Policy Committee Notifications

[op-ed snap] The misplaced faith in an easy money policyop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Monteary Policy basics

Mains level : Limitations of monetary pollicy

The reaction of global markets to the US Federal Reserve’s monetary stance suggests investors are vesting too much faith in easy money to promote investment and growth.

Why the emphasis on monetary policy

  1. RBI does have more leeway to reduce its repo rate now that the Fed has lowered its own lending rate in the US by a quarter percentage point
  2. An RBI rate cut may stem the slide in stock prices, but this can be rationalized only by virtue of the signal it sends of RBI’s intent to aid a sluggish economy, not for a quick revival

Limitations of monetary policy

  1. There is evidence to suggest that the efficacy of monetary policy is diminishing.
  2. In the West, this is largely because the cost of capital is already very low by historical standards
  3. Much cheap credit goes into chasing higher-paying assets around the world instead of spurring business activity
  4. In India, monetary policy is even less potent in spurring investment. Various other factors beyond the cost of capital act as a drag.
  5. Of the three- quarters of a percentage point reduction in RBI’s repo rate this year, banks have passed on barely half
  6. With consumption on a downtrend, the will of companies to borrow and invest is weak

Way ahead

  1. What might restore market sentiment are renewed inflows from abroad into Indian shares and securities set off by the Fed’s move
  2. Infrastructure spending spree
  3. Implementing a set of major reforms that allow market forces to play an effective role in most of the arenas
  4. Easing land acquisition rules and turning the country’s labour market flexible could have a dramatic effect on India’s appeal as an investment destination
  5. Reversal of some income tax rules seen as extortionary by rich investors 
  6. LTCG tax could be given a rethink

It is a good time for reforms. Let’s not over-rely on monetary policy.

Monetary Policy Committee Notifications

RBI has cut lending rates for the third consecutive timePriority 1


From UPSC perspective, the following things are important :

Prelims level : Repo and Reverse Repo

Mains level : Monetary policy decisions

  • The RBI has reduced the repo rate by 25 basis points (bps) to 5.75 per cent in the second bi-monthly monetary policy meet of the financial year 2019-20 (FY20).
  • It was a third straight interest rate cut by the RBI’s monetary policy committee (MPC).

What is Repo Rate?

  • REPO denotes Re Purchase Option – the rate by which RBI gives loans to other banks.
  • In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period.
  • Bank gives loan to the public at a higher rate, often 1% higher than REPO rate, at a rate known as Bank Rate.
  • RBI at times borrows from banks at a rate lower than REPO rate, and that rate is known as Reverse REPO rate.

Why has RBI cut repo rate

  • The RBI was widely expected to go for an interest rate cut amid dismal gross domestic product (GDP) growth, subdued investment and slowdown in consumption space.
  • Last week, government data showed GDP growth slowed to a five-year low of 5.8 per cent in the fourth quarter (Q4) of FY19.
  • Weak growth amid benign CPI inflation had created room for the Monetary Policy Committee to cut the repo rate by 50-75 bps through FY20E, beginning in June 2019.

Concern over the cut

  • The big concern is whether the transmission of the cut takes place adequately, in the sense of banks passing in the rate cut to customers.
  • This has not happened sufficiently in the case of the previous cuts.


Monetary Policy Committee

Monetary Policy Committee Notifications

[op-ed snap] No surprisesop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Repo Rate

Mains level : RBI through rate cut is trying to address slowdown in growth as well as keeping inflation in check.


There was 25 basis points cut in benchmark interest rates by the Reserve Bank of India in its first bi-monthly policy statement of the financial year announced on Thursday.

Need for Cut and basis of cut

  • The market had anticipated such a cut and the only question was whether the central bank would surprise with a deeper 50 basis points cut.
  • In the event, the Monetary Policy Committee (MPC) seems to have decided to hold its horses and settle for a conservative approach given the divergent sets of data that it was confronted with.

1.Fluctuating Inflation Rate

  • On the one hand, inflation, despite the mild spike in February, is well under control at 2.6% and is projected to average 3.2% to 3.4% in the first half of 2019-20.
  • This is below the 4% target set for the MPC.

2.Factors influencing Inflation

  • But there are some factors that could spring a surprise on the upside, such as the behaviour of the monsoon and the trend in global oil prices, both of which feed directly into inflationary expectations.
  • Early forecasts indicate a strong possibility of a below-normal monsoon due to El Niňo. Such an event would cast a shadow on agricultural output, and consequently the food prices.
  • Similarly, global oil prices are now edging close to the $70 a barrel mark on the back of production cuts by the OPEC cartel.
  • While the soft growth trends in the global economy could act as a check on any runaway increase in oil prices, the chances of a sharp fall in the next few months appear remote at this point in time.
  • If these are points of upward pressure on inflation, on the other side growth has been faltering in the last few months, going by both data on industrial output and overall GDP.

Slowdown in growth rate

  • The Central Statistics Office has revised the GDP growth for 2018-19 downwards to 7% while the RBI has projected a lower growth of 7.2% in 2019-20 compared to the 7.4% estimated in the last policy.
  • The 25 basis points cut is, therefore, an acknowledgement by the MPC of the slowdown in growth.

Policy Shift

  • It also signals a shift in policy since Shaktikanta Das assumed office as Governor of the RBI, whereby the MPC is not solely focussed on inflation but also takes into account growth trends with equal seriousness.
  • The MPC’s neutral policy stance is prudent given the uncertainties ahead as it gives the central bank the flexibility to tailor policy to emerging data sets.



Meanwhile, New Governor has sent out a welcome, clear signal on the central bank’s commitment to the framework for resolution of stressed assets in the backdrop of the Supreme Court striking down its circular issued on February 12, 2018. While underlining that the RBI’s powers have not been compromised, he has indicated that the central bank will soon reissue the circular taking into account the apex court’s observations. This is as it should be.


Monetary Policy Committee Notifications

RBI cuts Repo RatePrelims Only


From UPSC perspective, the following things are important :

Prelims level : Repo and Reverse Repo

Mains level : Monetary Policy of the RBI

  • The RBI cut its repo rate, or the rate at which it lends to banks, by 25 basis points to 6 per cent.

What is Repo Rate?

  • REPO denotes Re Purchase Option – the rate by which RBI gives loans to other banks.
  • In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period.
  • Bank gives loan to the public at a higher rate, often 1% higher than REPO rate, at a rate known as Bank Rate.
  • RBI at times borrows from banks at a rate lower than REPO rate, and that rate is known as Reverse REPO rate.

Why a cut?

  • The key consideration for the RBI has shifted from inflation to growth and analysts are betting on the lower inflation rate as well as slower growth in the economy to spur the decision to slash rates.
  • In its last policy review in February, the MPC had shifted the monetary policy stance to ‘neutral’ from ‘calibrated tightening’.

Implications for Consumers

  • For retail consumers, a cut in rates could have a two-pronged impact. For depositors, new deposits will earn a lower rate and thereby lower returns.
  • For borrowers, though, a downward movement of interest rate would bring down the interest outgo in the near future.


Monetary Policy Committee

Monetary Policy Committee

Monetary Policy Committee Notifications

[op-ed snap]Ease the flowop-ed snap


Mains Paper 3: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of RBI’s open market operations.

Mains level: The news-card analyses the reasons for high interest rates its implications over the economy, in a brief manner.



RBI’s tight monetary policy has kept real interest rates high, impacting investment flow and job creation.

High Interest Rates

  • Between January 2018 and January 2019, India’s consumer price inflation has fallen from 5.07 per cent to 2.05 per cent, year-on-year.
  • Yet, the State Bank of India’s MCLR or marginal cost of funds-based lending rate for three years has gone up from 8.10 per cent to 8.75 per cent.
  •  ICICI Bank, likewise, has raised its MCLR for one year from 8.2 per cent to 8.8 per cent.
  • Even yields on 10-year government of India bonds have fallen only marginally from 7.67 per cent to 7.37, despite inflation sliding so sharply.

Impact on Growth

  •  We have today are very high “real” rates of interest.
  • If businesses are borrowings at not less than 9 per cent — micro, small and medium enterprises would obviously be paying much more — when inflation, whether based on the consumer or wholesale price index, is below 3 per cent, it is something serious.
  • During 2012-13 and 2013-14, consumer price inflation averaged 9.7 per cent, whereas benchmark prime lending rates ranged at 9.75-10.25 per cent.
  • Average consumer inflation has come down to 3.6 per cent in 2017-18 and 2018-19 (till January 2019).
  • High real interest rates for a prolonged period is why investments have slowed down and very few jobs are being created.

Reasons for high interest rates

  • The source of it has been the RBI’s tight monetary policy. 
  • A firm commitment to low inflation and macroeconomic stability helped restore investor confidence badly dented during the loose fiscal and monetary policies.
  • But the tightening has gone on for too long.

Way Forward

  • The RBI should cut its overnight lending or “repo” rate in the next policy review meeting in April.
  •  It can even go in for a 0.5 percentage point reduction, instead of the usual 25 basis points.
  • The central bank could also consider more open market operations to bring down bond yields across all maturities. 
  • The government, too, should slash interest rates on the Employees Provident Fund, small savings and other administered schemes.


Monetary Policy Committee Notifications

[op-ed snap] Growth prop On RBI repo rate cutop-ed snap


Mains Paper 3: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of RBI’s open market operations.

Mains level: The news-card analyses the recent rate cut by RBI and its implications over the economy, in a brief manner.


  • The RBI has recently cut the benchmark repo rate.
  • However, concerns over the fiscal deficit remains.

Change of stance

  • Barely four months after the Reserve Bank of India switched its monetary policy stance to one of ‘calibrated tightening’, signalling interest rates were set to trend higher, it has reversed direction.
  • Not only did the RBI’s monetary policy committee unanimously opt to revert to a ‘neutral’ posture, but the rate-setting panel unexpectedly decided, by a 4-2 majority, to cut the benchmark repo rate by 25 basis points, to 6.25%.

MPC’s reasoning has been fairly straightforward

  • With Consumer Price Index-based inflation having continued to slow and projected to stay well below the medium-term target of 4% till at least the October-December quarter, the MPC saw an opportune moment to pivot to a growth-supportive stance.
  • That there is a need to bolster economic momentum is evident from the RBI’s downward revision of the forecast for growth in the first half of the next fiscal year.
  • The projection has been lowered to a range of 7.2-7.4%, from 7.5% posited in the RBI’s December statement, as moderating global growth and slowing overseas demand add uncertainties to the prevailing domestic imbalances.
  • Specifically, production and import of capital goods, which is a key gauge of investment demand, contracted in November/December and credit flows to industry remain muted.
  • With an overall shortfall of 4% in rabi sowing across various crops, and storage in major reservoirs at just 44% of the full level, the slowdown in farm output growth may end up being more protracted.

Weakening of demand

  • The less-than-sanguine outlook for the rural economy is also reflected in the high-frequency indicators of the services sector.
  • Data on sales of both motorcycles and tractors in December underscore weakening demand in the hinterland.
  • This weakness in the farm sector is undergirding the unprecedented softness in food prices.
  • The December CPI data showed continuing deflation in food items.

MPC’s acknowledgment

  • While the RBI’s inflation calculus clearly benefits from the ongoing trend in price gains, the MPC is justifiably cognisant of the tenuousness of the assumptions it has made for its forward projections.
  • Importantly, while it has assumed a normal monsoon this year, the central bank acknowledges that any variation in geographic spread or uneven distribution in terms of time could roil the inflation outlook.

Way Forward

  • However, the RBI’s policy statement fails to make any mention of its hitherto abiding concern about fiscal prudence.
  • With the Interim Budget showing some slippage from the fiscal roadmap and projecting a budget deficit of 3.4% for both the current financial year and the next, the risk of government borrowing crowding out private investment demand remains tangibly real.
Monetary Policy Committee Notifications

[op-ed snap] No easy transferop-ed snap


Mains Paper 3: Indian Economy| Issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: fiscal stimulus, fiscal policy

Mains level: The newscard discusses impact of easing — fiscal, monetary, and regulatory, on the Indian economy, in a brief manner.


  • Rising agrarian distress and the (chronic) headwinds confronting small and medium enterprises (SMEs) have taken center stage.
  • Extrapolating from this, some are fearing a more generalised and sustained slowdown.
  • This has inevitably led to calls for some easing — fiscal, monetary, regulatory.


  1. The economic narrative in India has rapidly evolved. As recently as October, the policy was focused squarely on preserving macroeconomic stability as external imbalances rose to unsustainable levels and the rupee came under relentless pressure.
  2. With global crude prices collapsing since then and domestic food prices remaining exceptionally benign, stability concerns have receded.
  3. The agrarian distress has already resulted in 10 states announcing farm loan waivers over the last two years.
  4. Now, there is a growing clamour among commentators to introduce unconditional cash transfers to serve as income support for distressed farmers nationally, as has been attempted in Telangana and Odisha.

Dangerous path to tread

  1. First, fears of a growth slowdown are overstated. Near-term prospects have meaningfully improved, as crude prices have collapsed, monetary conditions have eased, and banks have quickly stepped in to fill any void left by non-bank-financial-companies (NBFCs).
  2. Second, bond yields have fallen by almost 70 bps from their highs and, even accounting for some increase in NBFC spreads, monetary conditions have eased to a two-year low.
  3. Third, non-food bank credit growth has picked up sharply, accelerating to a four-year high of 14 per cent, suggesting banks are quickly and increasingly stepping in to fill some of the NBFC voids.
  4. Finally, while the collapse in food prices hurts farmers’ purchasing power and rural consumption, it helps urban consumption.

Amid rising capacity utilisation and the firming of core inflation recently, easing would simply exacerbate underlying imbalances and sow the seeds of future macroeconomic instability.

  1. Fiscal exhaustion
  • The total public sector borrowing requirement (Centre, state, off-balance sheet, central public sector enterprises) was still a hefty 8.2 per cent of GDP in 2017-18.
  • Although, the Centre has been bringing its deficit down, but this has been completely offset by state deficits, off-balance sheet borrowing, and central public sector-enterprise borrowing rising commensurately.
  • Unsurprisingly, this has led to fiscal exhaustion among markets. The slope of India’s government yield curve has continuously risen in recent years.
  • The implication is clear: Any fiscal relaxation at this point will become counter-productive, pushing up borrowing costs and crowding out economic activity.
  1. Fiscal imbalances vis-à-vis external counterpart
  • The current account deficit (CAD) is simply an economy’s investment-savings gap. Public dis-savings remain elevated. Therefore, the main reason the CAD narrowed is because private investment slowed so sharply.
  • If the private investment cycle picks up — as we all hope — the CAD would balloon, unless the public-sector imbalance reduces.
  • In other words, without more fiscal consolidation, we will always be choosing between a sustainable CAD and higher private investment.

The policy challenge

  1. There is absolutely no space for new unfunded liabilities. The pace at which farm loan waivers have been proliferating is worrying, even though budgetary allocations have been much lower than announcements.
  2. As is well known, loan waivers are a particularly blunt instrument suffering from the familiar pitfalls of vitiating credit culture, addressing the symptom, not the underlying cause, and disproportionately favouring larger farmers who rely on institutional credit.

Impact of Proposed direct, unconditional, cash transfers as income support for farmers

  1. A variety of proposals have been mooted from paying farmers the difference between market prices and minimum support prices (MSPs) in cash, to a broader quasi-universal basic income that covers 25-50 per cent of the population, costing anywhere from 1-5 per cent of GDP based on their expansiveness.
  2. The question is how will this be paid for, given that India’s fiscal cup runneth over? The policy challenge, therefore, is to either find the fiscal space for cash transfers by reducing existing subsidies and welfare programmes, or to offer either existing product subsidies or equivalent cash transfers, but not both. In the current environment, both options look politically daunting.

Could the RBI’s excess capital pay for income support?

  1. RBI special dividend will either be one-off or staggered over a few years, whereas any new farm-income-support creates a perpetual liability.
  2. Second, from an accounting perspective, the fiscal deficit will not widen because the additional expenditure will be paid for by the transfer of capital from the RBI.
  3. If the transfer, for example, is spent on cash transfers — instead of retiring public debt — the “effective fiscal impulse” will increase by the full quantum of that spending tantamount to a fiscal stimulus, with the attendant implications on pressurising macroeconomic imbalances.

Will the pressure on the fiscal be accompanied by monetary and regulatory easing?

  1. There is growing market/bank clamour for some regulatory easing towards banks. Policymakers must eschew this.
  2. NPAs appear to have peaked, the IBC has changed the debtor-lending balance of power, the government has injected more capital, and credit growth has increased smartly in recent months.
  3. Lowering lending standards through any regulatory easing at this stage, risks undoing accruing gains and triggering a fresh wave of NPAs down the line.

Way forward

  1. India cannot get complacent in this environment and inadvertently indulge in any excesses. India’s growth prospects have improved, and there is no case, or space, for an inadvertent confluence of fiscal/regulatory/monetary easing.
  2. Resolving the stress in agriculture and SMEs is imperative but requires well-known supply-side reforms to improve scale, productivity and viability.
Monetary Policy Committee Notifications

Explained: The reserves in Reserve BankPriority 1


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Economic Capital of RBI

Mains level: Debate regarding the independence of RBI and Fiscal Strain on Govt.



  1. The government and the RBI are engaged in fixing an appropriate economic capital framework for the central bank.
  2. The central government is expecting from RBI to re-distribute its surplus for recapitalization process to counter NPA crisis.

What is Economic Capital?

  1. Banks and financial institutions are faced with long-term future uncertainties that they intend to account for.
  2. Economic capital (EC) is the amount of risk capital that a bank estimates in order to remain solvent at a given confidence level and time horizon.
  3. The concept of economic capital has gained significance especially after the global financial crisis in 2008.
  4. The crisis exposed many central banks in the world to multiple risks, which forced many of them US Federal Reserve, Bank of England and European Central Bank to pump in liquidity.
  5. They tempted to buy securities and expand their balance sheets to boost confidence in the financial system and to ensure that critical institutions did not collapse.

What drives balance sheet of Central Banks?

  1. The balance sheet of central banks is unlike that of the institutions that it regulates or supervises.
  2. They are not driven by the aim of boosting profits given their public policy or public interest role.
  3. Their aim is primarily ensuring monetary and financial stability and maintaining confidence in the external value of the currency.
  4. Central banks do make money or the profits earned by issuing currency which is passed on to the owner of the central bank, the government.
  5. But they are typically conservative and the crisis prompted a review of the capital buffers that central banks and commercial banks needed.

Potential Risks to Central Banks

  1. Traditionally, central banks have been factoring in risks such as credit risk when there could be a potential default by an entity in which there has been an investment or exposure.
  2. There is also interest rate risk when interest rates either move up or slide, depending on the price of which securities or bonds held by a central bank or banks can be impacted.
  3. Besides, there is operational risk when there is a failure of internal processes.
  4. To measure these risks, both quantitative and qualitative methods are typically used.

The RBI proposal

  1. RBI holds a huge pile of foreign exchange reserves, and as the lender of last resort it described as contingent risks arising from its public policy role in fostering monetary and financial stability.
  2. In 2015, the RBI discussed this and put in place a draft Economic Capital Framework, or ECF.
  3. The rationale for such a capital framework was that there were increased risks to its balance sheet.
  4. RBI sought for an adequate capital buffer, critical not only to achieving its objectives, but also to ensuring the credibility of the central bank.

Concerns of RBI

  1. RBI pointed out that a weak balance sheet could force the central bank to rely more on excessive seigniorage (profit made by issuing currency) income, which would run in conflict to its price stability mandate.
  2. A compelling reason for RBI to build large capital buffers is to try and preempt a situation where they have to approach their governments for putting up their capital for recapitalization.
  3. That is seen by them as an erosion of their operational independence.
  4. The sovereign governments themselves are under fiscal strain.
  5. This strengthens the case for ex-ante capitalization (based on forecasts) than ex-post capitalization i.e. better to build a capital framework way ahead of a crisis.

Capital Buffer: A Case in England

  1. In June this year, the Bank of signed a MoU on a capital framework and on distributing its surplus.
  2. This new capital framework would ensure that the bank’s policy work is fully funded.
  3. The bank is to be equipped with capital resources consistent with monetary and financial stability remits given by Parliament.
  4. It provides a robust and transparent system that ensures the credibility of the bank’s policy action in even the most stressed environment, and reflects the new way in which the bank provides liquidity.

How it works

  1. The Bank of England’s capital will be capped by a ceiling above which all net profits are transferred to the treasury as dividend.
  2. It also ensures that there is a floor below which a rapid recap to the target is triggered.
  3. When the cap is below the target, no dividend is paid; when the cap is between the ceiling and the target, 50% of net profits is paid as dividend.
  4. These parameters are to be reviewed every five years.

Challenges in India

  1. The Bank of England has said that its capital framework takes into account its wide remit.
  2. That’s an argument the RBI can easily take, for its mandate too is wider than many central banks.
  3. There is also the fact that in India, the government that owns a large number of banks is itself struggling to recapitalize
  4. The govt. is under fiscal strain to meet fiscal targets and to spend adequately on infrastructure and on social welfare schemes.

Way Forward

  1. The heart of the capital framework is a risk-based capital target reflecting forward-looking risks to the balance sheet over the next five years.
  2. Its level is determined by evaluating the loss impact of severe stress scenarios.
  3. In September 2016, then outgoing RBI Governor said the RBI board has adopted a risk-management framework which indicates the level of equity the RBI needs citing potential risks it faces.
  4. The dividend policy of the RBI is a technical matter of how much residual surplus is available each year after bolstering equity.
  5. Such frameworks thus reduce the space for differences.
Monetary Policy Committee Notifications

Decoding the Central Board of the RBIPriority 1


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Everything about RBI Board of Directors

Mains level: RBI-Govt tussle


  • The Central Board of Directors of the RBI has recently been a topic of much discussion in the light of both the recent public tussle with the Finance Ministry and the second anniversary of demonetization.

Why has the RBI Board been in the news?

  1. The RBI Board recently entered the news during the public spat between the central bank and the Finance Ministry.
  2. One of the reasons for the disagreement was the government’s alleged threat of invoking Section 7 of the RBI Act.
  3. Section 7 basically empowers the government to supersede the RBI Board and issue directions to the central bank if they are considered to be “necessary in public interest”.

RBI Board

  1. The RBI Board is a body comprising officials from the central bank and the Government of India, including officials nominated by the government.
  2. According to the RBI, the general superintendence and direction of the affairs and business of the RBI is entrusted to the Central Board.
  3. The Board exercises all powers and does all acts and things that are exercised by the RBI.
  4. The Board is also to recommend to the government the design, form and material of bank notes and also when and where they can serve as legal tender.


  1. The Board consists of official directors, who include the Governor and up to four Deputy Governors.
  2. Non-official directors include up to ten directors from various fields and two government officials and one director from each of four local boards of the RBI.
  3. The Governor and Deputy Governors hold office for not more than five years, the ten directors nominated by the government hold office for four years.
  4. The government officials are to hold a term on the RBI Board as long as the government sees fit.
  5. According to the RBI Act, the director of the RBI Board cannot:
  • be a salaried government official (except for the ones specifically nominated by the government)
  • be adjudicated as insolvent or have suspended payments to creditors
  • be an officer or employee of any bank (again, this does not include the government nominee), or, ,
  • if found lunatic or becomes of unsound mind


  1. The Governor has to call a Board meeting at least six times in a year, and at least once each quarter.
  2. A meeting can be called if a minimum of four Directors ask the Governor to call a meeting.
  3. The Governor or, if for any reason unable to attend, the Deputy Governor authorised by the him to vote for him, presides the Board meetings.
  4. In the event of split votes, the Governor has a second, or deciding vote.
Monetary Policy Committee Notifications

[op-ed snap] Prudent increase: on RBI’s rate hikeop-ed snap


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Monetary Policy Committee, Repo Rate

Mains level: Impact of global events on Indian economy


MPC hikes Repo rate

  1. The decision by the Reserve Bank of India’s Monetary Policy Committee to raise benchmark interest rates again by 25 basis points is a prudent one
  2. This is the second successive rate increase in as many months, a response to mounting uncertainties on the inflation front

Why the increase?

  1. Continuing volatility in crude oil prices, the recent softening notwithstanding, and its vulnerability to geopolitical tensions and supply disruptions is one of the main risks to the inflation outlook
  2. Among the RBI’s other concerns are:
  • volatile global financial markets
  • possibilities of fiscal slippage at the Central and State levels
  • the likely impact of the increase in the minimum support price for Kharif crops
  • the staggering impact of upward revisions to house rent allowance paid by State Governments

Global developments & their risk

  1. Rising trade protectionism threatens to impact investment flows, disrupt global supply chains and hurt all-round productivity
  2. Depreciation in the value of most currencies against the strengthening dollar have rippled through many major advanced and emerging economies, spurring inflation across these markets

Way Forward

  1. The MPC’s primary remit is to ensure that retail inflation stays firmly within a band of 2-6%, and preferably anchored at 4% over the medium term
  2. With inflation widely accepted as a hidden tax on the poor, the containment of price gains justifiably ought to be the raison d’etre of monetary policy
Monetary Policy Committee Notifications

[op-ed snap] RBI steers clear of policy adventurismop-ed snap


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the MPC.

Mains level: Recently, the monetary policy committee (MPC) that sets Indian policy interest rates did not spring any surprises in its first meeting of the new financial year: It left key policy rates unchanged. The newscard discusses some of the important forecasts of the committee.


Inflation forecast by the RBI

  1. The RBI expects inflation, based on consumer price index, to be in the rage of 4.7-5.1% in the first half of the fiscal and
  2. come down to 4.4% in the second half—including the effect of house rent allowance for Central government employees under the seventh pay commission
    Oil Prices
  3. Oil prices continue to remain volatile and elevated
    Food prices
  4. There is not much clarity on how the higher minimum support price (MSP) and related policies, announced in the Union budget, will be implemented
  5. However, it has been reported that an increase in MSPs, and ensuring these for farmers, could push up farm gate prices by about 15%
  6. This could have a significant impact on retail food inflation
  7. Further, there is a risk of fiscal slippage at both the Central and state levels
  8. Also, if the monsoon turns out to be deficient, it will have consequences for both inflation and government expenditure

Growth forecast by the RBI

  1. On the growth front, the MPC has revised its gross domestic product (GDP) growth forecast to 7.4% in the current fiscal from 6.6% in the last fiscal
  2. A pick-up in bank credit and resource mobilization from the market should help push investment activity

Possible effect of increased MSPs

  1. As noted earlier, a substantial increase in MSPs could push inflation and affect inflationary expectations, forcing the MPC to raise policy rates
  2. Possible fiscal slippage could push the cost of money in the financial market, affecting investments and growth

Current account deficit is expected to increase

  1. It will be crucial to watch capital flows as the current account deficit is expected to widen this year
  2. While India has sufficient reserves to effectively handle possible volatility in the currency market, policymakers would do well to remain vigilant on this front

The way forward

  1. With well-anchored inflationary expectations, financial markets can expect a more stable monetary policy, which will not necessarily respond to every supply-side shock to headline inflation in the short run
  2. This will provide a more stable macroeconomic environment, which will help push up investment and growth in the medium to long term


Monetary Policy Committee

Monetary Policy Committee Notifications

RBI to link base rate with MCLR from 1 April


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Base rate, MCLR

Mains level: Monetary policy procedure and effects

Improving monetary policy transmission

  1. The Reserve Bank of India (RBI) will link the base rate for loans with the marginal cost of funds-based lending rate (MCLR) from 1 April
  2. This is likely to narrow the gap between the base rate and MCLR, and benefit borrowers who are still using the base rate
  3. It is being seen as a phasing out of the base rate system

MCLR benefits

  1. The MCLR is more sensitive to monetary policy transmission and is closely linked to the actual deposit rates
  2. MCLR is calculated on the basis of incremental cost of funds, making it a more reliable benchmark rate as compared to the base rate
  3. MCLR is reviewed on a monthly basis and base rate on a quarterly basis


  1. Since April 2016, while the repo rate has been reduced by 75 basis points, State Bank of India’s base rate has come down by 65 basis points but the one-year MCLR by as much as 1.25 percentage points
  2. One basis point is one-hundredth of a percentage point


Base Rate

  1. Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers
  2. Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of fund to their customers


  1. MCLR actually describes the method by which the minimum interest rate for loans is determined by a bank – on the basis of marginal cost or the additional or incremental cost of arranging one more rupee to the prospective borrower
  2. The MCLR is a tenor linked internal benchmark (tenor means the amount of time left for the repayment of a loan)
  3. The MCLR comprises of the following:

    a) The marginal cost of funds which is a novel concept under the MCLR methodology comprises of Marginal cost of borrowings and return on net worth, appropriately weighed.


    b) Negative carry on account of’ Cash reserve ratio (CRR)- Negative carry on the mandatory CRR arises because the return on CRR balances is nil. Negative carry on mandatory Statutory Liquidity Ratio (SLR) balances may arise if the actual return thereon is less than the cost of funds.

    c) Operating Cost associated with providing the loan product, including cost of raising funds, but excluding those costs which are separately recovered by way of service charges.

    d) Tenor Premium- The change in tenor premium cannot be borrower specific or loan class specific. In other words, the tenor premium will be uniform for all types of loans for a given residual tenor.

  4. The MCLR methodology for fixing interest rates for advances was introduced by the Reserve Bank of India with effect from April 1, 2016
Monetary Policy Committee Notifications

RBI monetary policy tomorrow: 3 reasons why central bank may keep rates on hold


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Monetary policy committee, repo rate, Consumer Price Index, minimum support price, Economic Survey

Mains level: Impact of various indicators on RBI’s monetary policy

Interest rate likely to remain unchanged

  1. RBI’s monetary policy committee is likely to keep interest rate unchanged noting several upside risks to inflation
  2. RBI is expected to keep the repo rate—the rate at which the central bank lends to banks—unchanged at 6%

Reasons why the central bank may keep rates on hold

  1. Inflation: Retail inflation, as measured by the Consumer Price Index (CPI), has already breached 4%, the RBI’s medium-term target, for two consecutive months
  • Rising oil prices and lingering impact of rise in house rent allowance, as part of the 7th Pay Commission, are likely to keep future inflation prints elevated
  • There might be potential impact of the budget announcement of minimum support price (MSP) of agricultural commodities on inflation

2. Oil prices: Higher oil prices have been one of the key factors contributing to the rise in inflation

  • Further rise in prices will not only impact inflation but also other indicators such as current account deficit as well as growth because India is the net importer of oil
  • According to the Economic Survey, $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points

3. Bond yields: Going by the current surge in bond yields, interest rate in India is unlikely to come down anytime soon

  • Bond yields, which reflect the interest rate trajectory, have risen because of higher supply and fiscal slippage
  • The government raised fiscal deficit target for 2018-19 to 3.3% from 3%

Read point no. 2 again. Economic survey data is important and can be directly used in answers in Mains as well as in Essay. This increases your chances of scoring more in Mains.

Civilsdaily’s Advanced program for Economic Survey and Budget takes care of providing you with all such important facts and figures from last 3 years Economic survey

Know more about the program and join here: Click2Read

Monetary Policy Committee Notifications

[op-ed snap] The importance of inflation expectationsop-ed snap


Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The newscard discusses the importance of the FIT and ‘inflation expectations’. No need to go through the details of the economics concepts given in the article(unless, you have economics optional).

What is New Keynesian Phillips Curve (NKPC)?

  1. It is one of the important blocks of the New Keynesian framework, has become a dominant tool to model inflation dynamics among central bankers
  2. It relates current inflation to the expected future inflation

Adoption of “flexible inflation targeting” (FIT)

  1. Many central banks around the world have adopted an inflation targeting framework, also called “flexible inflation targeting” (FIT)
    (also adopted by the RBI)
  2. For an inflation-targeting central bank, understanding the dynamics of inflation is a prerequisite to developing a perspective on what type of monetary policy is required to achieve the inflation target on a sustainable basis
  3. For inflation-targeting monetary policy, understanding the nature of inflation expectations is of paramount importance

Importance of ‘Inflation Expectations’ in monetary policy

  1. A highly credible central bank can anchor the medium to long-term inflation expectations around the target and hence disinflation occurs smoothly without much disruption to the output
  2. Also, if the inflation expectations are firmly anchored, any temporary shocks to inflation would not persist for long, thereby making the task of monetary policy easy

Importance of the NKPC

  1. The forward-looking nature of the NKPC makes it an ideal candidate to model inflation in the presence of forward-looking inflation expectations
  2. The NKPC therefore has important implications for inflation-targeting monetary policy

The International Monetary Fund’s World Economic Outlook (2013): on inflation

  1. It had a very interesting chapter titled “The Dog That Didn’t bark: Has Inflation Been Muzzled Or Was It Just sleeping?”
  2. The chapter explains how inflation in the advanced countries did not fall, even after large increases in unemployment during the great recession that ensued from the 2008 financial crisis
    Possible reasons behind this
  3. First, it was found that the relation between inflation and the economic slack has weakened over the last few years
  4. Second, credible central banks may have firmly anchored inflation expectations and contributed to keeping inflation more stable

Adoption of the FIT framework by the RBI

  1. The RBI has adopted the FIT framework with consumer price index inflation as the nominal anchor
  2. The primary objective of monetary policy is to achieve the inflation target over the medium-run with some flexibility to address growth concerns in the short-run
  3. The given flexibility is important to address the high-inflation-low-growth puzzle confronted by the Indian economy recently
  4. Even though inflation in India is susceptible to different supply shocks, firmly anchored medium- to long- run inflation expectations may generate the scope for monetary policy to stimulate growth
    (in the short-run by allowing inflation to deviate from the target)

The way forward

  1. The overall success of inflation-targeting framework depends on how credible the central bank is and how well the inflation expectations are being anchored
  2. The RBI needs to do exactly that


Phillips curve

  1. The Phillips curve is an economic concept developed by A. W. Phillips showing that inflation and unemployment have a stable and inverse relationship
  2. The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment
  3. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment
Monetary Policy Committee Notifications

What to note in RBI monetary policy beyond rate action


Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Repo rate, Goods and services tax (GST), Consumer Price Index, Liquidity Adjustment Facility, open market operations (OMO), fiscal deficit

Mains level: factors that affect RBI’s monetary policy in short and long term

RBI’s monetary policy committee likely to leave rates unchanged

  1. This might be due to the concerns of rising inflation
  2. The key repo rate—the rate at which RBI infuses liquidity in the banking system might be kept unchanged at 6%

Growth & inflation forecast

  1. In the last policy, RBI had revised the fiscal year 2017-18 growth target down to 6.7% from 7.3%
  2. This was done citing adverse shocks, especially to the manufacturing sector, from the implementation of the goods and services tax (GST)
  3. The latest GDP growth number for the quarter ended September has inched upwards to 6.3, showing recovery
  4. Inflation, as measured by Consumer Price Index has accelerated, inching closer to the 4% mark, which is the central bank’s medium-term target
  5. CPI inflation is expected to rise in the second half of the financial year

Liquidity management

  1. Due to gradual rise in currency in circulation and pick up in credit off-take, liquidity situation is moving towards neutral from surplus mode
  2. RBI might use overnight and term repos under the Liquidity Adjustment Facility to manage liquidity in the near term
  3. Additional open market operations (OMO) seem unlikely, given the cancellation of the OMO sale last month

Government finances commentary

  1. RBI is likely to reiterate its caution regarding the impact of fiscal slippages on inflation in the coming month
  2. The government has already reached 96% of the budgeted fiscal deficit
Monetary Policy Committee Notifications

MPC minutes spotlight risks to inflation; signal RBI may stay on ‘hold’


Mains Paper 3: Indian Economy

The following things are important from UPSC perspective:

Prelims: MPC, UPSC has asked question on MPC in 2017 Preliminary examination.

Mains: Nothing much, just the trend of inflation needs to be kept in mind.




The Recent MPC Meeting

  1. A majority of the members of the Reserve Bank of India’s (RBI) monetary policy committee flagged an increase in inflation risks.
  2. The central bank held its key policy interest rate at 6%.
  3. It also observed that a deceleration in retail inflation had been temporary as headline inflation.

How to keep headline inflation close to 4% ?

  1. It is important to recognise near and medium-term risks to the inflation outlook
  2. There is a need to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach.

The inflation outlook for the coming months

  1. It is time to be in readiness to raise the policy rate to suppress the underlying drivers of inflation if they strengthen further
  2. CPI inflation was likely to moderate to about 3% in October.
  3. But this would be driven by food prices, while core inflation was likely to stay above 4% amid rising risks of fiscal slippage.


  1. The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016,  to provide for a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth.
  2. The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
  3. The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting
  4. The MPC will have six members – the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three members would represent the Government of India.


Monetary Policy Committee Notifications

[op-ed snap] Space for a cut: On RBI repo rate cut

Image result for RBI repo rate cut

Image source


Mains Paper 3: Economy | Indian Economy Issues relating to planning

Once you are done reading this op-ed, you will be able to attempt the below mentioned question.

Explain the working of monetary policy committee? Why there is a pressure on the monetary policy committee to cut interest rates ?

From UPSC perspective, the following things are important:

Prelims level: Monetary policy committee, different types of inflation

 Mains level: Monetary policy committee working



  • Reserve Bank of India did cut the policy repo rate by 25 basis points, and has opted to play safe while nominally acceding to the clamour for softer lending rates. 

Bimonthly policy statement

  1. It refers to the significant slowdown over the past three months in core inflation — retail price gains excluding those for food and fuel
  2. Monsoon has so far been normal, and the initial roll-out of GST has been “smooth”.
  3. Monetary policy committee chosen to retain the “neutral” stance, given that it expects the trajectory of inflation to rise from current lows amid a welter of uncertainties

Chances for Inflation?

  1. Due to the implementation of farm loan waivers by States
  2. State governments will implement salary and allowance increases following the Centre’s implementation of the seventh pay panel-related hikes.
  3. A second successive normal monsoon that could check food costs and a stable international commodity price outlook — that could help keep the inflation trajectory favourable. 

Way forward

  1. Impulses for growth in industry and services are weakening, so the Centre and the States to take enabling steps, through policy measures and directed fiscal actions, to give a thrust for the revival of private investment
  2. It will serve nobody’s interests if the rate reduction doesn’t have “the desired amplifier effects on the economy” and ends up only temporarily masking the true problems in the banking and real sectors.


The Monetary Policy Committee (MPC)

  1. It is a committee of the Central Bank in India, headed by its Governor, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
  2. Monetary Policy Committee is defined in Section 2(iii)(cci) of the Reserve Bank of India Act, 1934
  3. The MPC replaces the current system where the RBI governor, with the aid and advice of his internal team and a technical advisory committee, has complete control over monetary policy decisions.

Composition of MPC

  1. Monetary Policy Committee is an executive body of 6 members. Of these, three members are from RBI while three other members are nominated by the Central Government.
  2. Each member has one vote. In case of a tie, the RBI governor has casting vote to break the tie


Monetary Policy Committee Notifications

Centre notifies amended RBI Act for MPC

  1. News: Centre has brought the Monetary Policy Committee (MPC)  closer to reality by notifying changes made to the Reserve Bank of India (RBI) Act
  2. The rules governing the procedure for selection of members of MPC and factors constituting failure to meet inflation target have also been notified
  3. MPC: Tasked with bringing value and transparency to monetary policy decisions
  4. Frequency: MPC to meet 4 times a year and make public its decisions following each meeting
  5. Members: Total 6 members, including 3 members from RBI- the Governor (ex-officio chairperson), a Deputy Governor and an officer of the RBI
  6. The other 3 non-RBI members will be appointed on the recommendations of a search-cum-selection committee headed by the Cabinet Secretary
  7. The non-RBI members will be experts in economics, banking, finance or monetary policy
  8. They will be appointed for 4 years & will be ineligible for re-appointment
Monetary Policy Committee Notifications

RBI expected to cut rates next week

  1. Context: Survey by Reuters of 50 ecnomists showed the interest rate was likely to be cut to 6.50% at the 5 April review
  2. Findings: Falling inflation will give India’s central bank room to cut interest rates at policy review
  3. It might cut them again by September, before holding steady to assess the impact of the upcoming monsoon season on food prices
  4. Need: An accommodative monetary policy is the need of the hour with industrial and agricultural data suggesting weakness
Monetary Policy Committee Notifications

5-member panel proposed to decide monetary policy

Ministry’s note for the Cabinet’s approval proposes a five-member Monetary Policy Committee.

  1. Government will nominate two members and the RBI three members.
  2. Each of five members have one vote and the RBI Governor, chair of the committee, will have a casting vote in the event of a tie in situations such as the absence of a member.
  3. Inflation target for the RBI in each financial year will be determined by the Government in consultation with the RBI itself.
  4. At present, the Governor is advised by a technical committee but can veto decisions, being singularly responsible for monetary policy.

Draft of Indian Financial Code, proposed a six-member monetary policy committee, besides powers for the government to appoint four of the six members.

Monetary Policy Committee Notifications

FinMin moves Cabinet note on monetary policy committee

The RBI a very credible institution, nothing will be done in MPC that undermines the role of the RBI

  1. Cabinet note on setting up the proposed monetary policy committee (MPC), where RBI is expected to retain its dominant role.
  2. MPC to take key decisions on interest rate changes, and is decided by the central bank Governor on advice of the technical advisory committee.
  3. Government and RBI have already signed a monetary policy framework that has set an inflation target of 4 per cent.
  4. MPC comprises of Seven members, three from the RBI and three government nominees, with the RBI Governor having the casting vote.
  5. Under the current system, RBI Governor is appointed by the government, but controls monetary policy and has veto power over the existing advisory committee of RBI members.
Monetary Policy Committee Notifications

The name is Rajan, Raghuram Rajan

Rajan can certainly justify the swagger with which he spoke at the post-policy press conference

  1. My name is Raghuram Rajan and I do what I do,” joked the RBI governor when asked whether the central bank’s outlook was hawkish while the policy statement is dovish.
  2. In one clean shot, RBI has silenced critics who were insisting that growth in the economy was being held back by the high real interest rates in the economy.
  3. RBI’s decision was driven by a number of domestic and global factors.
  4. Domestically, the enabling factors for a rate cut had been put in place, with consumer price inflation remaining in check.
  5. The ebbing of inflation in the year so far is due to a combination of low month-on-month increases in prices and favourable base effects.
  6. Growth, remains sluggish, forcing the central bank to bring down its growth projection for 2015-16 to 7.4% from the earlier forecast of 7.6%.
  7. Underlying economic activity, remains weak on account of the sustained decline in exports, rainfall deficiency and weaker-than-expected momentum in industrial production and investment activity.
  8. Keeping those two domestic factors in mind against the backdrop of a weakening global economy, Rajan appears to have taken a leap of faith and frontloaded 50 basis points in rate cuts.

Rajan announced that RBI will gradually increase the foreign investment limit in central government bonds to 5% of the outstanding stock of government securities by March 2018.

Monetary Policy Committee Notifications

Monetary policy committee: vote or veto?op-ed snap

  1. Govt. and RBI have been on the same page in most of the monetary policy actions, except few.
  2. The expression of ‘high growth with moderate inflation‘ suffice the balance in a developing country.
  3. A veto is the antithesis of a vote. A vote and a veto co-exist uneasily and with unhappy consequences only in the UN Security Council.
  4. It would be unwise to say that govt. cannot be trusted to nominate qualified or independent members for MPC, in fact RBI governor is also appointed by them.
Monetary Policy Committee Notifications

[Discuss] Can anyone elaborate on the need for RBI to be independent?

Don’t the normal principles of political accountability – govt. is accountable to people and thus will take care of growth/ inflation/ interest rate decisions in the best interests of people, apply here?


Is it just a simple matter of separation of powers? Certain bodies must be independent from government control, though independence in no way should imply lack of accountability.

Will this bring the conflict of growth and inflation to the fore? The problem is that monetary policy tools will result in growth with immediate effects. However, any policy decisions regarding inflation takes a long time for it to take effect.


Let’s have a better, more informed debate around this. Shall we?

Monetary Policy Committee Notifications

[Discuss] RBI at the risk of losing autonomy?

RBI has always been in news for two things – the legendary Raghuram Rajan and the (infinite) committees he summons. One such committee was the Urjit Patel Committee which had suggested some reforms which have snowballed into the modern day speculation of RBI’s autonomy loss. What’s the real deal? 


FSLRC draft gives the centre the right to appoint 4 out of 7 monetary policy committee members, and takes away the veto power of RBI governor.

  1. The latest FSLRC draft gives the Union government the right to appoint 4 out of 7 MPC members.
    • FSLRC – Financial Sector Legislative Reforms Commission
    • MPC – Monetary Policy Committee
  2. It also takes away the veto power of the RBI governor even as he will have a casting vote in the event of a tie in the MPC (which can happen if one member is absent at the meeting).

Remember the 2014 Urjit Patel Committee report?

RBI deputy governor Urjit Patel had recommended a 5-member MPC with the governor as the chairman. Overly tilted in favour of RBI, this report also suggested that the governor and, in his absence the deputy governor, will have a casting vote in case of a tie, but it was not in favour of the governor enjoying the veto power.

The FSLRC draft goes ahead and places more power in the hands of the govt.



Monetary Policy Committee Notifications

Give the RBI its independenceop-ed snap

  1. The new draft of Indian Financial Code released by finance ministry provides for setting up of a Monetary Policy Committee (MPC) to decide policy rate.
  2. Currently, Technical Advisory Committee (TAC) advises RBI on such issues, but RBI governor has the right to veto any decision of TAC.
  3. FSLRC suggested that 7-member MPC, shall be appointed after due consultations between the govt. and the RBI, with 3 nominees from govt. and veto power for RBI governor.
  4. However, the draft seeks to vest in the govt. the power to nominate 4 members to the MPC, without any veto power to Governor.
  5. Though, it is not wrong to allow the govt. a say in the matters of monetary policy, but it appears to undermine RBI’s autonomy.
Monetary Policy Committee Notifications

Another thorn in the love-hate relationship of Govt & RBI

  1. Govt’s proposal on the composition of the Monetary Policy Committee is diametrically opposite to that of Urjit Patel Committee’s recommendations.
  2. Patel Committee had suggested that all the members of MPC should be chosen by RBI while Govt. wants the majority in the MPC panel.
  3. Going by international norms, except in Colombia, Guatemala and the Philippines, the Govt. does not have representation in the MPC.

To read about the basic concepts of economics at play here:

  1. Economics | Fiscal Policy Explained
  2. Economics | Monetary Policy Explained with Examples

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