RBI Monetary Policy: Key Highlights

The RBI plays a key role in shaping the Indian economy through its monetary policies. One of its primary tools is the adjustment of the repo rate, which affects the borrowing and lending rates across the economy.

Last February, the RBI raised the repo rate by 25 basis points and brought it to 6.50%. With this move, the central bank wanted to balance inflation control while maintaining steady economic growth. With inflationary pressures and global uncertainties affecting the domestic economy, RBI’s stance and actions have significant implications for the nation’s financial stability.

• RBI raised the repo rate to 6.50% to control inflationary pressures; it remained at 6.5% as of June 2024.
• Gradual removal of accommodative stance signals RBI focusing on inflation management.
• Projected 6.5% GDP growth for FY 23-24 exceeded, driven by rising consumption and exports.
• External factors like global commodity prices and weather may still impact the efficacy of RB measures.

One of the major themes in the present monetary policy of RBI is inflation control. The central bank aims to maintain inflation at around 4%, with an acceptable deviation of up to 2%.

However, the persistence of high inflation levels in recent times has led to policies that are marking a withdrawal from its previous accommodative stance. The accommodative stance, where the central bank keeps interest rates low to support economic growth, is now being phased out to ensure that inflation remains within acceptable limits.

As inflation has been fuelled by various factors, including rising food and energy prices, the decision to raise the repo rate will prevent further price surges.

Supply-side constraints, global commodity price fluctuations, and domestic pressures have contributed to inflationary shocks, especially in sectors like petroleum and electricity. 

The decision to increase the repo rate to 6.50% is a reflection of the RBI’s commitment to maintaining price stability in the face of rising inflation. This repo rate has been maintained as of June 2024.

A hike in the repo rate means higher borrowing costs for banks, which in turn affects loans and credit availability for consumers and businesses. By adjusting the repo rate, the RBI aims to control inflationary trends without stifling economic activity.

This delicate balance is crucial for ensuring that the economy continues to grow while managing the risks posed by inflationary pressures. The Monetary Policy Committee (MPC), which voted overwhelmingly (5/6) in favour of the rate increase, sees the adjustment as necessary to prevent long-term inflation from destabilising the economy.

Despite the increased focus on inflation management, the RBI is still positive about growth prospects of the Indian economy. In its April 2023 Monetary Policy Resolution, the central bank forecasted a growth rate of 6.5% for FY24. This was exceeded according to the Centre’s estimate of 8.2% growth in real GDP.

Rural and urban demand is still expected to rise as domestic economic activities gain momentum. Moreover, global markets are beginning to stabilise, and India’s exports are poised to contribute positively to economic growth.

While inflationary pressures continue to persist, especially in food and energy sectors, the RBI expects that economic recovery will continue, supported by robust consumption and industrial activity.

External factors, such as global commodity prices and supply chain disruptions, still pose risks to inflation and growth trajectory of the economy.

However, the RBI’s monetary policy highlights the importance of keeping domestic factors in check. For example, the reduction in excise duties on petroleum products has provided some relief, but global crude oil prices remain a point of concern. Moreover, weather-related disruptions like heatwaves could further impact food prices, creating additional inflationary pressures.

The RBI’s cautious approach to raising the repo rate and gradually withdrawing its accommodative stance reflects its awareness of these external and internal challenges. By maintaining flexibility in its policy approach, the central bank is preparing to adapt to changing economic conditions both domestically and globally.

The Reserve Bank of India’s recent monetary policy actions highlight the delicate balance it seeks to maintain between controlling inflation and supporting economic growth.

With the repo rate still at 6.50%, the central bank continues to focus on managing inflationary pressures while ensuring that growth is not entirely compromised.

As external factors such as commodity prices and weather-related disruptions continue to influence inflation, the RBI’s policy decisions will be critical in shaping the economic outlook for FY25. By phasing out its accommodative stance and adjusting the repo rate, the central bank is taking necessary steps to safeguard the financial stability of the economy while keeping the broader goals of growth in mind.

While these measures have been effective in the past months, it remains to be seen how RBI will respond to the evolving global economic condition. The cautious but determined approach of RBI signals its commitment to navigating these challenges and ensuring a stable, growing economy.
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