RBI Monetary Policy Committee (MPC) Meeting August 2024: Key Takeaways

Repo Rate Held Steady at 6.5%

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has maintained the repo rate at 6.5% for the ninth consecutive meeting, with a majority decision of 4-2. This decision reflects the committee’s cautious approach amidst persistent food inflation and its commitment to maintaining price stability.

Policy Stance: Withdrawal of Accommodation

The MPC also retained its policy stance of “withdrawal of accommodation,” aiming to curb inflation while supporting economic growth. This indicates that the RBI is focusing on gradually normalizing monetary conditions after the accommodative measures taken during the pandemic.

Economic Growth and Inflation Forecasts

• GDP Growth: The MPC has kept the forecast for India’s GDP growth in FY25 unchanged at 7.2%. However, the growth forecast for the first quarter of FY25 was slightly revised down to 7.1% from the earlier estimate of 7.3%.
• Inflation: The inflation forecast for FY25 remains at 4.5%. On a quarterly basis, the inflation projections were adjusted to 4.4% in Q2, 4.7% in Q3, and 4.3% in Q4, reflecting concerns over rising food prices.

Rising Food Inflation and Its Impact

Food inflation, which constitutes 46% of the headline inflation, continues to be a major concern. The RBI noted that food prices likely remained high in July, influencing the upward revision of the inflation forecast for Q2 of FY25. Governor Shaktikanta Das emphasized that controlling food inflation is crucial for sustaining overall price stability and supporting long-term economic growth.

RBI’s Broader Economic Outlook

The report also highlights several positive aspects of the Indian economy:

• Resilient Domestic Economy: Despite global challenges, domestic economic activity remains strong, with a manageable current account deficit and record-high forex reserves of $675 billion.
• Stable Financial System: The Indian financial system continues to gain strength, supported by robust economic fundamentals and prudent regulatory measures.

Key Policy Announcements

• Digital Lending Apps Repository: The RBI plans to set up a public repository of digital lending apps to curb unauthorized lending practices.
• Delegated Payments via UPI: A new feature, ‘Delegated Payments,’ will be introduced through the Unified Payments Interface (UPI), enhancing the payment system’s flexibility.
• Cheque Clearance: Steps will be taken to expedite the cheque clearance process.
• UPI Tax Payment Limit Increase: The limit for tax payments via UPI has been raised from ₹1 lakh to ₹5 lakh per transaction.

Implications for Borrowers

With the repo rate unchanged, banks are likely to keep their interest rates steady, meaning that existing Equated Monthly Installments (EMIs) on loans will remain unchanged. This decision provides some relief to borrowers amidst the ongoing inflationary pressures.

Rationale Behind Keeping the Repo Rate Unchanged

The decision to maintain the repo rate was influenced by the persistent issue of food inflation, which has the potential to derail the disinflationary trend. In June, the headline inflation rate rose to 5.1% from 4.8% in May, driven largely by an increase in food prices. RBI Governor Shaktikanta Das stressed that maintaining price stability is crucial for achieving sustained high growth, and the MPC remains vigilant to prevent any spillover effects from the ongoing food inflation.

The RBI’s cautious stance, as reflected in its decision to keep the repo rate steady and maintain a focus on price stability, underscores the central bank’s commitment to managing inflation while supporting economic growth. As the global and domestic economic landscapes continue to evolve, the RBI will likely remain vigilant, ready to adjust its policies as needed to ensure financial stability and sustained growth.

Additional Info:

1. Repo Rate (Repurchase Rate)

• Definition: The repo rate is the rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks against the collateral of government securities. It is a key tool used by the RBI to control inflation and manage liquidity in the economy.
• Impact:
  • When the RBI increases the repo rate, borrowing becomes more expensive for banks, which in turn makes loans costlier for consumers and businesses. This can help curb inflation by reducing spending.
  • Conversely, a decrease in the repo rate makes borrowing cheaper, encouraging spending and investment, which can stimulate economic growth.
• Current Rate: 6.50% (unchanged since February 2023)

2. Reverse Repo Rate

• Definition: The reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country. It is used to absorb excess liquidity from the banking system.
• Impact:
  • When the reverse repo rate is high, banks are incentivized to park their excess funds with the RBI, earning a return with minimal risk. This helps to drain excess liquidity from the system.
  • A lower reverse repo rate encourages banks to lend more money to consumers and businesses rather than parking it with the RBI.
• Current Rate: 3.35% (unchanged since May 2020)

3. Marginal Standing Facility (MSF) Rate

• Definition: The MSF rate is a special window for banks to borrow overnight funds from the RBI against government securities. The MSF was introduced by the RBI to provide banks with a safety valve against unexpected liquidity shocks.
• Impact:
  • The MSF rate is typically higher than the repo rate, and banks use this facility only in times of acute liquidity shortage.
  • It acts as a penal rate to discourage banks from relying on this facility unless absolutely necessary.
• Current Rate: 6.75% (unchanged since February 2023)

4. Bank Rate

• Definition: The bank rate is the rate at which the RBI lends money to commercial banks without any security for a long-term period. It is generally higher than the repo rate and is used as a benchmark for setting interest rates by banks.
• Impact:
  • An increase in the bank rate leads to a corresponding increase in lending rates for loans provided by commercial banks, thereby controlling inflation by reducing money supply.
  • A decrease in the bank rate has the opposite effect, encouraging borrowing and investment.
• Current Rate: 6.75% (unchanged since February 2023)

5. Cash Reserve Ratio (CRR)

• Definition: The CRR is the percentage of a bank’s total deposits that must be kept in reserve in the form of cash with the RBI. Banks do not earn any interest on these reserves.
• Impact:
  • A higher CRR reduces the amount of funds available for banks to lend, thereby tightening liquidity and controlling inflation.
  • A lower CRR increases the funds available for lending, boosting liquidity and promoting economic growth.
• Current Rate: 4.50% (unchanged since May 2022)

6. Statutory Liquidity Ratio (SLR)

• Definition: The SLR is the minimum percentage of a bank’s net demand and time liabilities (NDTL) that must be maintained in the form of liquid assets like cash, gold, or government-approved securities.
• Impact:
  • The SLR requirement ensures that banks have enough liquid assets to meet any unexpected demand for withdrawals, promoting financial stability.
  • A higher SLR restricts the bank’s ability to expand credit, thereby controlling inflation, while a lower SLR allows more funds to be available for lending, stimulating economic activity.
• Current Rate: 18.00% (unchanged since April 2020)

Summary of the Rates’ Roles:

• Repo Rate: Controls borrowing costs and overall money supply in the economy.
• Reverse Repo Rate: Manages excess liquidity in the banking system.
• MSF Rate: Provides emergency funding to banks at a higher cost.
• Bank Rate: Long-term lending benchmark influencing loan interest rates.
• CRR: Regulates the amount of cash banks must hold, affecting liquidity.
• SLR: Ensures banks maintain a certain level of liquid assets for stability.

Relevance for RBI Grade B Exam Aspirants

Understanding the repo rate, its impact on inflation, and how RBI uses these tools is important for those preparing for the RBI Grade B exam. Such details are directly relevant to the RBI Grade B syllabus and often come up in the RBI Grade B exam pattern. Aspirants should focus on mastering the concepts of monetary policy as part of their preparation for government job exams. Additionally, the RBI Grade B salary and job profile offer aspirants a unique opportunity to work closely with such financial policies, making it essential to stay updated with the latest developments.