The 52nd meeting of the Monetary Policy Committee of the Reserve Bank of India (RBI) kept the key policy rates unchanged. The repo rate was kept steady at 6.50%, while the cash reserve ratio (CRR) was cut by 50 basis points to 4%.
Key Points of RBI MPC Meeting (December 2024)
- Repo Rate: The repo rate was kept steady at 5%, which has remained unchanged since February 2023.
- This is the 11th consecutive time that interest rates have not been changed.
- CRR Cut: The cash reserve ratio (CRR) was reduced by 50 basis points i.e. from 50% to 4%, which will help banks with additional cash flow.
- Inflation Impact: RBI predicted inflation to rise, which could have a negative impact on economic growth.
- For this reason, the GDP growth rate has been reduced by 2% to 6.6% for FY25.
GDP growth forecast
- Growth is estimated at 9% in the first quarter of FY25 and 7.3% in the second quarter.
- Overall GDP growth rate in FY25 is limited to 6%.
- Inflation forecast: Inflation rate for FY25 is kept at 8%, while for FY26 Q1 and Q2 it is expected to be 4.6% and 4% respectively.
- Digital security: Modern tools like AI have been introduced to prevent digital fraud.
- Expansion of UPI service: UPI services will now be extended to Small Finance Banks, which will boost digital transactions.
Special relief for farmers
- The limit of collateral free agricultural loan (agricultural loan without mortgage) was increased from Rs 6 lakh to Rs 2 lakh per borrower.
- This decision was taken keeping in mind the rising level of agricultural costs and inflation.
- It was last changed in 2019.
Important other facts
- In February 2023, the interest rate was increased by 25% to 6.5%.
- RBI’s monetary policy meeting is held every two months.
- The Reserve Bank has decided to maintain the policy stance ‘neutral’ keeping in mind the possible economic challenges of the future.
Repo Rate
- The repo rate is the interest rate at which the country’s central bank (Reserve Bank of India in India) lends money to commercial banks when there is a shortage of funds. This rate is a means of controlling monetary policy.
Use of Repo Rate
Controlling Inflation
- When inflation rises, the central bank increases the repo rate.
- This makes it costlier for commercial banks to borrow from the central bank.
- As a result, the money supply in the economy decreases and inflation is controlled.
- Maintaining economic stability: A reduction in the repo rate allows banks to make cheaper loans, which increases the flow of money in the economy and encourages growth.
Inflation
- nflation is a persistent increase in the prices of goods and services in a particular economy. This reduces the purchasing power of consumers, and the value of cash decreases.
Who measures inflation
- In India, the Ministry of Statistics and Program Implementation (MoSPI) measures inflation.
Major causes of inflation
- Increase in demand: When the demand for goods and services exceeds the supply.
- Decrease in supply: Supply decreases due to disruption in production or shortage of raw materials.
- Demand-supply gap: Deterioration of the balance between demand and supply.
- Excessive circulation of money: When the supply of money in the economy is more than required.
- Increase in input cost: Increase in the prices of raw materials, electricity, fuel etc.
- Devaluation of currency: When the value of currency decreases in the international market.
- Increase in wages: Increase in the salary of workers increases the cost of production.
Monetary Policy Committee
- Monetary Policy Committee (MPC) is a statutory body playing an important role in the economic policy of India, whose objective is to promote economic growth while controlling inflation.
Formation and Background
- The MPC was established following a Memorandum of Understanding (MoU) between the Government of India and the Reserve Bank of India (RBI).
- Its objective is to implement the new monetary policy framework based on inflation targeting.
- The Reserve Bank Act, 1934 was amended through the Finance Act, 2016 to give statutory status to the MPC.
- Legal Provisions: Under Section 45ZB of the amended Reserve Bank Act, 1934, the Central Government is empowered to constitute a six-member MPC.
Functions
- The main function of the MPC is to determine the repo rate, so that inflation can be kept within the set target.
- It replaces the earlier Technical Advisory Committee.
Structure
The MPC has six members:
- RBI Governor (Chairman),
- RBI Deputy Governor handling monetary policy,
- An official nominated by the RBI Board, and
- Three external members appointed by the Central Government.
- The term of the external members is four years.
- The quorum for a meeting is four members, of which at least one must be the RBI Governor or Deputy Governor in his absence.
Decision making process
- The decisions of the MPC are taken on the basis of majority.
- If there is a tie in votes, the RBI Governor has the casting vote.
- The decisions of the MPC are binding on the RBI.
- The Monetary Policy Department (MPD) of the RBI assists the MPC in policy making.
Monetary Policy Committee:
- The Monetary Policy Committee of the RBI meets every two months and decides on increasing or decreasing the interest rates. • Its function is to control the country’s economy, and these decisions are important for maintaining the financial stability of the country.
- Policy Rate: Policy Rate is an effective tool of any Central Bank, which is used to control inflation and maintain stability in the economy.
Effect of Policy Rate in Inflation
When inflation is high
- When inflation increases in the economy, the Central Bank reduces cash flow by increasing the policy rate.
- When the policy rate increases, it becomes expensive for banks to take loans from the Central Bank.
- As a result, banks increase the interest rates on loans given to their customers.
- Due to high interest rates, people and companies take less loans, which reduces demand.
- Inflation falls due to decrease in demand.
Effect of Policy Rate in Economic Slowdown
During a slowdown in the economy
- When the economy is weak and recovery is required, the Central Bank reduces the policy rate.
- This allows banks to get cheap loans from the Central Bank.
- Loans are provided by banks to customers at low interest rates.
- Getting loans at cheap rates increases cash flow, which increases demand and revives the economy.
Reserve Bank of India (RBI)
- RBI was established on 1 April 1935.
- Earlier it used to control the supply of currency and credit for Indian banks.
- The head office of RBI was earlier in Kolkata, but in 1937 it was shifted to Mumbai.
- In 1949, the Government of India took complete control of RBI.
- The highest official of RBI is the Governor, who is responsible for the Indian banking system.
- It also issues licenses to Indian banks, and monitors the operations of Indian banks abroad.
Tenure of Governor
- The term of the RBI Governor is 3 years, but it can also be extended.
- Its longest tenure was 2754 days (from July 1949 to 14 January 1957).
- Amitav Ghosh took over as Governor for 20 days in 1985.
First Governor
- The first Governor of RBI was Sir Oscar Sims.
- Currently Shaktikanta Das is the Governor of RBI.
Appointment of Governor
- The Governor of RBI is appointed by the Government of India, which is under the guidance of the Ministry of Finance.
- The Governor is appointed with the approval of the Union Cabinet.
Official Functions
- The function of the Governor of RBI is to control the banking sector of India, and it is responsible for strengthening the public financial system.
- RBI’s functions include formulation of the country’s financial policy, control of money supply and maintaining stability of the banking sector.
- Contribution in the modern era: RBI now plays a vital role in the regulation of the financial sector, and has undertaken several reforms to make the Indian banking system more transparent.