MPC maintains the benchmark repo rate at 6.5% - Daily Current Affairs for UPSC

The MPC maintained the repo rate at 6.5% for the seventh consecutive time in a row.

The RBI projects India’s real Gross Domestic Product (GDP) growth to be 7% for FY25.
Consumer Price Index (CPI) inflation softened to 5.1% during January-February 2024 from 5.7% in December.
RBI projects CPI inflation for 2024-25 at 4.5%, with quarter-wise projections.
Despite this moderation, food inflation increased to 7.8% in February, primarily driven by vegetables, eggs, meat, and fish.
Core inflation (CPI excluding food and fuel) disinflation took it down to 3.4% in February, one of the lowest in the current CPI series.
Domestic economic activity remains resilient, backed by strong investment demand and upbeat business and consumer sentiments.
Headline inflation has come off the December peak; however, food price pressures interrupt the ongoing disinflation process.

The decision to maintain the repo rate unchanged at 6.50% by the RBI is based on an assessment of inflationary pressures, economic growth prospects, and the need for policy consistency to achieve the dual objectives of price stability and economic growth.
The RBI aims to ensure that inflation progressively aligns with the target while supporting growth.
This unchanged repo rate supports economic activity by keeping borrowing costs stable.
The decision reflects the need for sustained disinflation until inflation reaches the 4% target on a durable basis.

Keeping the repo rate high can have both positive and negative consequences:

• Positives:

Controlling Inflation: High rates help curb inflation by making borrowing more expensive, incentivizing savings, and reducing money supply.
Currency Stability: High rates can attract foreign capital inflows, stabilizing the exchange rate and supporting the rupee.

• Negatives:

Slowed Economic Growth: High borrowing costs can discourage investments and consumer spending, leading to slower economic growth.
Increased Loan Burden: Businesses and individuals with existing loans might face higher interest payments, impacting their financial health.
Reduced Credit Availability: Banks might become more cautious in lending, hindering credit flow to key sectors like infrastructure and real estate.

• Established in 2016 under the amended RBI Act, 1934.

• It has six members:

The primary function of the MPC is to determine the benchmark interest rate, also known as the repo rate.
The repo rate influences the cost of borrowing for banks and indirectly impacts lending rates to businesses and individuals.
The MPC meets at least four times a year to review the monetary policy stance and decide on adjustments to the repo rate.

Inflation Targeting: The MPC is mandated to maintain inflation within a target range set by the government. This helps ensure price stability and protects the value of the rupee.
Transparency and Accountability: The MPC’s decisions are based on data-driven analysis and are made public, fostering transparency in monetary policy formulation.

The use of interest rates and other tools by a central bank (like the RBI) to influence the money supply, economic activity, and inflation.

Repo Rate: The repo rate, or repurchase agreement rate, is the interest rate at which the central bank lends money to commercial banks against the collateral of government securities.
Reverse Repo Rate: The reverse repo rate is the interest rate at which the central bank borrows money from commercial banks by selling securities with the agreement to repurchase them in the future.
Open Market Operations (OMO): Open market operations refer to the buying and selling of government securities by the central bank in the open market to regulate the money supply in the economy.
Cash Reserve Ratio (CRR): Cash reserve ratio is the percentage of bank deposits that commercial banks are required to keep as reserves with the central bank in the form of cash.
Statutory Liquidity Ratio (SLR): Statutory liquidity ratio is the percentage of net demand and time liabilities (deposits) that banks are required to maintain as liquid assets in the form of cash, gold, or government-approved securities.

Price Stability: Maintain low and stable inflation to protect the purchasing power of the currency.
Economic Growth: Promote sustainable economic growth and employment.
Financial Stability: Ensure the smooth functioning of the financial system.