• The Reserve Bank of India (RBI) slashed key interest rate by 25 basis points, for the second time in a row, on April 9.

• The Monetary Policy Committee (MPC) unanimously decided to slash policy repo rate by 25 basis points to 6.25 per cent, RBI Governor Sanjay Malhotra said.

• It is expected to provide relief to home, auto and corporate loan borrowers.

• Repo rate, which is also known as the benchmark interest rate, is the rate at which the RBI lends money to the banks for a short term. Reverse repo rate is the borrowing rate at which RBI borrows money from banks for a short term.

• In its last policy in February, RBI had trimmed the repo rate by 25 basis points to 6.25 per cent.

• The RBI also cut India’s growth forecast to 6.5 per cent from 6.7 per cent estimated earlier for the current financial year on account of impact of global trade and policy uncertainties.

Rationale for these decisions

• The global economic outlook is fast changing. The recent trade tariff related measures have exacerbated uncertainties clouding the economic outlook across regions, posing new headwinds for global growth and inflation. 

• Financial markets have responded through sharp fall in dollar index and equity sell-offs with significant softening in bond yields and crude oil prices.

• Under these circumstances, central banks are navigating cautiously, with signs of policy divergence across jurisdictions, reflecting their own domestic priorities.

• The MPC held its 54th meeting from April 7 to 9 under the chairmanship of RBI Governor Sanjay Malhotra. The MPC members Nagesh Kumar, Saugata Bhattacharya, Ram Singh, Rajiv Ranjan, and M. Rajeshwar Rao attended the meeting.

• After assessing the current and evolving macroeconomic situation, the MPC unanimously voted to reduce the policy repo rate by 25 basis points to 6 per cent with immediate effect.

• The global economy is going through a period of exceptional uncertainties. The difficulty to extract signal from a noisy and uncertain environment poses challenges for policy making. Nevertheless, monetary policy can play a vital anchoring role in ensuring that the economy remains on an even keel.

Monetary policy by RBI

• Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy.

• The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.

• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.

• In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.

• The amended RBI Act also provides for the inflation target to be set by the government of India, in consultation with the Reserve Bank, once in every five years.

• The Monetary Policy Committee (MPC) constituted by the central government under Section 45ZB determines the policy interest rate required to achieve the inflation target.

Members of MPC

• There are six members in the MPC and the RBI governor is the chairperson.

• As per the provisions of the RBI Act, out of the six members of the Monetary Policy Committee, three members will be from the RBI and the other three Members of MPC will be appointed by the central government.

Composition of MPC:

a) The Governor of the RBI — chairperson, ex officio

b) Deputy Governor of the RBI, in charge of Monetary Policy — member, ex officio

c) One officer of the Bank nominated by the Central Board — member, ex officio

d) Three persons appointed by the central government — members.

• The MPC is required to meet at least four times in a year.

• The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy.

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