Context
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), decided to keep the repo rate
unchanged at 6.5 percent.
Key Decisions/Highlights from April MPC:
• RBI has forecast the Indian economy to grow at 7 percent in FY25.
• The Committee sees Q1FY25 growth rate at 7.1%, Q2 at 6.9%, Q3 and Q4 at 7% each, with risks evenly
balanced.
• Forex reserves at an all time high of $645.6 billion as of March 29.
• Inflation: Core inflation has declined steadily over the past 9 months to its lowest level in the series.
• Indian Rupee: The Indian rupee (INR) was most stable in FY24 among major economies.
• As compared to the previous 3 years, INR exhibited lowest volatility in 2023-24.
• INR stability mirrors strong fundamentals, financial stability, and external improvements.
• Food prices: An expected normal south-west monsoon should support agricultural activity.
• Low reservoir levels, especially in the southern states and outlook of above normal temperatures during
April-June, also pose concern.
• Pulses and vegetable prices require close monitoring.
About RBI Monetary Policy Committee
• The Monetary Policy Committee or the MPC is a 6 member committee that is led by the RBI governor.
• The first such MPC was constituted in 2016.
• The MPC determines the policy repo rate required to achieve the inflation target.
• The MPC is required to meet at least four times in a year. The quorum for the meeting of the MPC is four members.
• Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second
or casting vote.
• Each Member of the Monetary Policy Committee writes a statement specifying the reasons for voting in
favour of, or against the proposed resolution.
What is Monetary Policy?
• It is the use of operating instruments available to central banks to achieve stated objectives.
• The central bank, such as India’s Reserve Bank of India (RBI), formulates and implements policy measures
to achieve these objectives.
• The instruments available to CBs include fractional reserve banking, Liquidity Adjustment Facility, Open
Market Operations, Forward Guidance, and Policy Communication.
• In an “Inflation Targeting” (IT) framework the CB is mandated to manage inflation.
• India adopted IT in 2016 and targets 4% of inflation with a band of 2%.
Instruments of Monetary Policy
Fractional Reserve Banking:
• CRR: RBI mandates banks to keep a fraction of deposits with RBI. This rate is called the Cash Reserve
Rate. An increase in CRR would reduce the money at the disbursal of banks to lend, reducing overall
money supply.
• SLR: RBI also has made it statutorily mandatory for banks to invest in government bonds and safe deposits.
This mandated fraction is called the Statutory Liquid Ratio (SLR). Currently, the SLR is 18%.
Liquidity Adjustment Facility (LAF):
• Repo Rate: It is the interest rate at which the bank can raise money from RBI-on an overnight basis-against
the collateral of government securities. Lower Repo rate will make it easier for the bank to borrow and
inject more money in the economy.
• Reverse Repo Rate: The rate at which the bank can park their collateral of government securities with RBI
is called the Reverse Repo rate.
• Standing Deposit Facility (SDF) Rate: It is the rate at which RBI accepts non collateralized deposits, on
an overnight basis, from all LAF participants. It is fixed 25 bps below the repo rate.
• Marginal Standing Facility (MSF) rate: It is the additional rate- fixed 25 bps above the repo rate- at which
banks can borrow, on an overnight basis, from the RBI dipping into their Statutory Liquidity Ratio (SLR)
portfolio up to a predefined limit of 2 percent.
• Bank Rate: The Bank Rate is the additional rate the bank has to incur for not meeting the CRR and SLR
norms. It is aligned with the MSF.
• Open Market Operations: From time to time, RBI uses the sale and purchase of Government Securities
intending to inject liquidity into the economy. This is called open market operations