RBI keeps repo rate unchanged at 5.25%

• The Monetary Policy Committee (MPC) held its 60th meeting under the chairmanship of RBI Governor Sanjay Malhotra from April 6 to 8. 

• After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC voted unanimously to keep the policy repo rate unchanged at 5.25 per cent. 

• 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.

• The policy decision comes amid West Asia conflict disrupted energy supplies, shot up crude oil prices and created fiscal and inflationary pressures for import-dependent nations like India.

Why RBI keeps policy rate unchanged?

• Since the last policy meeting in February, geopolitical uncertainties have heightened significantly. 

• Headline inflation remains contained and below the target, but upside risks to the inflation outlook have increased, driven by increased energy price pressures and probable weather disturbances affecting food prices. 

• The West Asia conflict will adversely impact growth. Higher input costs associated with increase in energy prices and international freight and insurance costs along with supply-chain disruptions could constrain availability of key inputs for downstream sectors, thus impairing growth. 

• The government has taken several measures targeted at supporting exports and protecting supply chains, which should mitigate the adverse impact of the conflict.

• The MPC noted that the intensity and the duration of the conflict in West Asia and the resultant damage to the energy and other infrastructure add risk to the inflation and growth outlooks. 

• However, the fundamentals of the Indian economy are on a stronger footing, providing it with greater resilience to withstand shocks now than in the past. 

• The economy is confronted with a supply shock. The MPC said it is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook. 

• Accordingly, the MPC voted to keep the policy rate unchanged.

• The next meeting of the MPC is scheduled for June 3 to 5.

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.