RBI Monetary Policy Meeting 2024

Why in the News?

In its 52nd Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) decided not to make any changes to the key policy rates. The repo rate was kept stable at 6.50%, while the cash reserve ratio (CRR) was reduced by 50 basis points to 4%.

Key Highlights of RBI Monetary Policy Committee (MPC) Meeting (December 2024):

1. Repo Rate:
   • The repo rate was maintained at 6.5%, unchanged since February 2023.
   • This marks the 11th consecutive instance of no change in the interest rates.
2. CRR Cut: The cash reserve ratio (CRR) was reduced by 50 basis points from 4.50% to 4%, providing additional liquidity to banks.
3. Inflation Impact:
   • RBI forecasted a rise in inflation, which could adversely impact economic growth.
   • As a result, the GDP growth projection for FY25 has been revised downward from 7.2% to 6.6%.
4. GDP Growth Estimates:
   • Growth estimates for FY25 are 6.9% in Q1 and 7.3% in Q2.
   • Overall GDP growth for FY25 is projected at 6.6%.
5. Inflation Projection: Inflation is estimated at 4.8% for FY25, and at 4.6% and 4% for FY26 Q1 and Q2, respectively.
6. Digital Security: Advanced tools like AI were introduced to combat digital fraud.
7. Expansion of UPI Services: UPI services will now be extended to small finance banks, encouraging digital transactions.
8. Special Relief for Farmers:
   • The collateral-free agricultural loan limit was raised from ₹1.6 lakh to ₹2 lakh per borrower.
   • This decision was made considering rising agricultural costs and inflation levels.
   • The last revision in this limit was made in 2019.
9. Other Important Facts:
   • In February 2023, the interest rate was increased by 0.25%, taking it to 6.5%.
   • RBI’s monetary policy meetings are held every two months.
   • The RBI decided to maintain a ‘neutral’ policy stance to address future economic challenges.

What is Repo Rate?

The repo rate is the interest rate at which a country’s central bank (RBI in India) lends money to commercial banks in case of a liquidity shortage. It is a tool to regulate monetary policy.

Uses of Repo Rate:

1. Inflation Control:
   • When inflation rises, the central bank increases the repo rate.
   • This makes borrowing from the central bank costlier for commercial banks.
   • As a result, the money supply in the economy decreases, controlling inflation.
2. Maintaining Economic Stability: A reduction in the repo rate allows banks to borrow at a lower cost, increasing money flow in the economy and fostering growth.

What is Inflation?

Inflation refers to the continuous increase in the prices of goods and services in a specific economy, reducing consumers’ purchasing power and the value of money.

Who Measures Inflation?

In India, the Ministry of Statistics and Programme Implementation (MoSPI) measures inflation.

Major Causes of Inflation:

1. Demand Increase: When demand for goods and services exceeds supply.
2. Supply Shortage: Due to production disruptions or raw material shortages.
3. Demand-Supply Gap: Imbalance between demand and supply.
4. Excess Money Supply: When the economy has more money than needed.
5. Rising Input Costs: Increases in prices of raw materials, electricity, fuel, etc.
6. Currency Depreciation: A fall in currency value in the international market.
7. Wage Increase: Higher wages increase production costs.

Monetary Policy Committee (MPC):

The Monetary Policy Committee (MPC) is a statutory body responsible for managing India’s economic policy, aiming to control inflation while promoting economic growth.

1. Formation and Background:
   • MPC was established following a Memorandum of Understanding (MoU) between the Indian government and the RBI.
   • It implements the inflation-targeting framework of the monetary policy.
   • The RBI Act, 1934, was amended through the Finance Act, 2016, to give statutory status to the MPC.
2. Legal Provisions:
   • Under Section 45ZB of the amended RBI Act, 1934, the central government has the authority to form a six-member MPC.
3. Functions:
   • The MPC’s primary role is to set the repo rate to keep inflation within the prescribed target.
   • It replaces the earlier Technical Advisory Committee.
4. Structure:
   • The MPC comprises six members:
     1. RBI Governor (Chairperson).
     2. RBI Deputy Governor in charge of monetary policy.
     3. One officer nominated by the RBI Board.
     4. Three external members appointed by the central government.
   • External members have a tenure of four years.
   • A quorum of four members is required for meetings, including the RBI Governor or, in their absence, the Deputy Governor.
5. Decision-Making Process:
   • Decisions are taken by majority vote.
   • In case of a tie, the RBI Governor has the casting vote.
   • MPC decisions are binding on the RBI.
   • The Monetary Policy Department (MPD) of the RBI assists the MPC in policymaking.

Monetary Policy Committee Functions:

• The MPC meets every two months to decide on changes to interest rates.
• It plays a vital role in stabilizing the economy and ensuring financial stability.

Policy Rate: Policy rates are an essential tool for central banks to regulate inflation and maintain economic stability.

Impact of Policy Rate on Inflation:

1. When Inflation is High:
   • The central bank increases policy rates, reducing money flow in the economy.
   • Higher rates make borrowing costlier, decreasing demand and curbing inflation.
2. During Economic Slowdown:
   • The central bank reduces policy rates to encourage borrowing.
   • This increases liquidity, boosting demand and revitalizing the economy.

About the Reserve Bank of India (RBI):

1. Establishment: RBI was established on April 1, 1935, initially to regulate currency and credit supply.
2. Headquarters:
   • Initially located in Kolkata, it was moved to Mumbai in 1937.
   • In 1949, the Government of India took full control of the RBI.
3. Governor:
   • The Governor is the highest authority responsible for the Indian banking system.
   • The RBI issues licenses to banks and oversees Indian banks’ operations abroad.
4. Governor’s Tenure:
   • The Governor’s tenure is three years but can be extended.
   • The longest tenure was 2,754 days (July 1949 to January 1957).
   • Amitabh Ghosh served the shortest tenure of 20 days in 1985.
5. First Governor:
   • Sir Osborne Smith was the first Governor of RBI.
   • Currently, Shaktikanta Das is the Governor of RBI.
6. Appointment of Governor: The Governor is appointed by the Government of India under the guidance of the Finance Ministry, with approval from the Union Cabinet.
7. Responsibilities:
   • Controlling the banking sector and strengthening public financial systems.
   • Formulating monetary policies, regulating currency supply, and ensuring banking sector stability.
8. Modern Contributions: The RBI plays a critical role in overseeing the financial sector and introducing reforms to make the Indian banking system more transparent.

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