Understanding RBI's Monetary Policy and its Recent Developments

Posted in Housing Articles By Sajhyadri Chattopadhyay-
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The Reserve Bank of India (RBI) wields its financial toolkit via periodic meetings where the central bank reviews its monetary policy. This controls various rates, investment details, credit allocation, etc. Hence, it is closely observed by bankers, investors, and economic enthusiasts. Staying abreast of the Monetary Policy and its latest developments is vital for any citizen.

Understanding RBI’s Monetary Policy

At its core, RBI's monetary policy helps the central bank balance price stability and economic growth. RBI’s aim is to foster growth while keeping prices in check. These decisions are orchestrated by the Monetary Policy Committee (MPC) and are pivotal to economic prosperity and financial stability. This committee comprises of 6 members and convenes every two months to scrutinise the economic landscape and craft the roadmap for economic credit flow.

Objectives of the Monetary Policy

The objectives of RBI's monetary policy are manifold –  

  • Currency Exchange Rates: 

By controlling the money supply, RBI influences the value of domestic currency against foreign ones, impacting exchange rates. 

  • Inflation: 

Maintaining low inflation is paramount for economic stability. High inflation leads the central bank to reduce its spending and its rate of monetary expansion to restore economic equilibrium.  

  • Credit Allocation: 

The RBI regulates credit allocation to ensure fairness across sectors and social classes. 

  • Unemployment: 

An expansionary monetary policy boosts employment opportunities by promoting business activities. 

  • Reducing Rigidity: 

RBI seeks competition and flexibility while maintaining financial discipline across sectors. 

Latest MPC Meeting Highlights

Recently, the Monetary Policy Committee convened for a three-day meeting, ending on 6th October 2023. Chaired by RBI Governor Shaktikanta Das, these deliberations included details and steps on the GDP growth, inflation forecast, additional economic measures, etc. 

1. Maintaining the Status Quo: 

The RBI decided to keep the repo rate steady at 6.5%. This decision aims to retain focus on withdrawing earlier accommodation. The Standing Deposit Facility (SDF) rate remained unaltered at 6.25%, with both the Marginal Standing Facility (MSF) rate and the Bank Rate at 6.75%. 

2. Inflation Outlook:

Factors like lower oil reserves, reduced khariff sowing, unpredictable global prices of energy and food led the Governor to project a Consumer Price Index (CPI) inflation of 5.4% for FY24. In this projection, Q2 stands at 6.4%, Q3 at 5.6%, and Q4 at 5.2%, with evenly balanced risks. Q1 of FY25 sees CPI inflation at 5.2%. 

3. Economic Growth: 

The RBI maintained a 6.5% real GDP growth projection for FY24. Moreover, a forecast for Q1 of FY25 sits at 6.6%. According to the RBI, India’s banking system exhibits resilience, with Non-banking Financial Companies (NBFCs) aligning well with the banking sector, as per the latest data from June. 

4. Liquidity and Open Market Operations: 

RBI’s discontinuation of the Incremental Cash Reserve Ratio (ICRR) had impounded ₹1.1 Lakh Crores from the banking system, which will be phased out. They expect improved liquidity and increased government spending with the release of these funds. The RBI may also use Open Market Operation (OMO) sales to manage liquidity. 

5. Foreign Capital Flows: 

Foreign Portfolio Investment (FPI) saw a significant inflow of $20.3 Billion till September 2023, versus previous two years’ net outflows. Net Foreign Direct Investments (FDIs) fell to $5.8 Billion in April-July from $17.3 Billion in the previous year. Overall, foreign exchange reserves grew by a net $24.4 Billion. 

6. Regulatory Framework: 

The MPC meeting discussed the formulation of a prudential framework for income recognition, asset classification, and provisioning, mainly regarding projects under implementation. They propose to soon release comprehensive regulatory guidelines applicable to all regulated entities. 

7. Credit Concentration Norms: 

In an attempt to harmonize credit concentration norms among NBFCs, the RBI decided to allow middle and base layer NBFCs to employ credit risk mitigation instruments. Governor Das announced that this will help to reduce their counterpart exposures. 

8. Gold Loan Scheme: 

Urban cooperative banks heaved a sigh of relief as the RBI doubled the limit under the bullet repayment scheme for gold loans to ₹4 Lakh from ₹2 Lakh. This is subject to these banks meeting both overall and sub-targets under norms of priority sector lending as per 31st March,2023. 

9. Self-Regulatory Organizations (SROs): 

In its October meeting, the RBI decided to draft guidelines for recognizing Self-Regulatory Organizations (SROs) overseeing various categories of regulated entities. The central bank will seek stakeholder input in the formulation of these guidelines. 

10. Extending Schemes: 

The RBI extended the payments infrastructure development fund scheme, including beneficiaries of the Prime Minister's Vishwakarma Scheme. This scheme's timeline was extended by two years, up to 2025. 


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