RBI Maintains Short-Term Lending Rate at 6.5% Amidst Economic Projections

Apr 5, 2024 | buisness

India’s Reserve Bank of India (RBI) has announced its decision to keep the short-term lending rate, or repo rate, unchanged at 6.5 per cent, Governor Shaktikanta Das declared on Friday (April 5). This decision comes following the culmination of the three-day meeting of the six-member Monetary Policy Committee (MPC), which convenes regularly to assess the economic landscape, including inflation and growth metrics.

The repo rate, a pivotal indicator of India’s monetary policy, signifies the interest rate at which the central bank lends to commercial banks. The RBI’s maintenance of the repo rate at its current level aligns with analysts’ predictions and underscores the central bank’s stance of withdrawing accommodation. This decision holds significant implications for banks and financial institutions, particularly regarding lending rates such as home loan interest rates, which are intricately linked to the RBI’s repo rate. A stable repo rate signifies consistency in interest rates for borrowers, providing assurance to homebuyers regarding steady loan interest rates. This stability proves beneficial for both new loans and existing ones with floating rates. It not only enhances affordability for potential homebuyers but also fosters consumer confidence, thereby sustaining demand in the real estate market.

Governor Das, who heads the MPC, also assured to maintain comfortable liquidity conditions. Since the last MPC meeting in February, liquidity conditions have eased primarily due to the RBI’s concerted efforts.

In terms of economic projections, the RBI has forecasted a retail inflation rate of 4.5 per cent for fiscal year 2024-25. This projection includes an inflation rate of 4.9 per cent in Q1, 3.8 per cent in Q2, 4.6 per cent in Q3, and 4.5 per cent in Q4 of FY25. Additionally, with regard to GDP growth, the RBI anticipates India’s GDP to expand by 7 per cent during FY25, slightly lower than the 7.3 per cent estimated by the National Statistical Office (NSO). The RBI has flagged potential risks to this outlook, including geopolitical tensions, volatility in international financial markets, and geo-economic fragmentation.

The revised GDP growth targets for different quarters of FY25 are as follows:

  • Q1FY25 GDP growth target at 7.1% vs 7.2% earlier
  • Q2FY25 GDP growth target at 6.9% from 6.8% earlier
  • Q4FY25 GDP growth target at 7% vs 6.9% earlier

Governor Das is scheduled to address the post-policy press conference at 11 am today, providing further insights into the RBI’s decision and its implications for the Indian economy.

Decoding RBI’s Monetary Policy 2024: A Comprehensive Overview

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Introduction: In the realm of economic governance, the Reserve Bank of India (RBI) wields significant influence through its monetary policy. As we navigate through the complexities of the year 2024, the RBI’s monetary policy assumes heightened importance in steering India’s economy towards stability and growth. This article serves as a comprehensive exploration of RBI’s monetary policy for 2024, dissecting its objectives, key indicators, tools, recent developments, and implications.

Key Indicators:

    • Cash Reserve Ratio (CRR): 4.50%
    • Statutory Liquidity Ratio (SLR): 18.00%
    • Repo rate: 6.50%
    • Reverse repo rate: 3.35%
    • Marginal Standing Facility rate: 6.75%
    • Bank Rate: 6.75%

Objectives of Monetary Policy

Monetary policy serves as a pivotal tool in shaping economic dynamics, aiming primarily at fostering economic growth while ensuring stability in prices and exchange rates. However, its scope extends beyond these fundamental objectives, encompassing various facets of economic management and development.

  1. Promotion of Saving and Investment: The manipulation of interest rates and inflation levels by monetary authorities significantly influences the propensity of individuals and businesses to save and invest. Higher interest rates incentivize saving and channel funds towards investments, thereby fostering a conducive environment for robust economic activity and maintaining a healthy cash flow within the economy.
  2. Controlling Imports and Exports: Monetary policy interventions, such as providing loans at reduced interest rates to export-oriented industries, facilitate import substitution and stimulate exports. By bolstering the competitiveness of domestic industries in global markets, monetary policy contributes to enhancing the balance of payments position and fostering economic resilience.
  3. Managing Business Cycles: Monetary policy plays a crucial role in mitigating the fluctuations of business cycles, characterized by phases of expansion and contraction. Through judicious management of credit supply, authorities can modulate the money supply to counter inflationary pressures during periods of economic expansion and stimulate demand during downturns, thereby promoting stability and sustainable growth.
  4. Regulation of Aggregate Demand: By exerting influence on credit availability and interest rates, monetary policy effectively regulates aggregate demand in the economy. Expansionary measures, such as lowering interest rates and increasing credit availability, stimulate consumer spending and investment, thereby boosting demand. Conversely, contractionary measures, including tightening credit and raising interest rates, curtail excess demand and contain inflationary pressures.
  5. Generation of Employment: Lowering interest rates through monetary policy measures facilitates access to credit for small and medium enterprises (SMEs), encouraging business expansion and job creation. By fostering a conducive environment for entrepreneurship and investment, monetary policy contributes to reducing unemployment and fostering inclusive growth.
  6. Facilitating Infrastructure Development: Monetary policy frameworks often include provisions for concessional funding aimed at promoting infrastructure development. By ensuring access to affordable financing for infrastructure projects, monetary authorities play a crucial role in enhancing the productive capacity of the economy and fostering sustainable development.
  7. Allocating Credit to Priority Segments: Monetary policy initiatives prioritize the allocation of credit at favorable terms to key sectors such as small-scale industries, agriculture, and marginalized segments of society. By channeling financial resources towards these priority areas, monetary authorities promote inclusive growth and address socioeconomic disparities.
  8. Managing and Developing the Banking Sector: The regulatory framework of monetary policy encompasses the management and development of the banking sector, overseen by central banks such as the Reserve Bank of India (RBI). Through directives and incentives, monetary authorities encourage the expansion of banking services, particularly in rural and underserved areas, thereby promoting financial inclusion and supporting agricultural development.

Flexible Inflation Targeting Framework (FITF)

The Flexible Inflation Targeting Framework (FITF) was implemented in India following the amendment of the Reserve Bank of India (RBI) Act, 1934, in 2016. As per the provisions of the RBI Act, the Government of India establishes the inflation target every five years after consulting with the RBI.

Under this framework, there is a possibility of not attaining the predetermined inflation target within a specified timeframe. This scenario may arise under the following circumstances:

  • When the average inflation exceeds the upper tolerance level of the inflation target set by the Central Government for three consecutive quarters.
  • When the average inflation falls below the lower tolerance level of the target inflation predetermined by the Central Government for three successive quarters.

In essence, the FITF provides a structured approach to managing inflation, allowing for adjustments based on evolving economic conditions and policy objectives.

Monetary Policy Tools

In order to regulate inflation, the Reserve Bank of India employs various tools to adjust the supply of money or the cost of funds, thereby managing the demand for goods and services.

Quantitative Tools

These tools have a broad impact on the money supply across the entire economy, spanning sectors like manufacturing, agriculture, automobile, housing, and more.

  1. Reserve Ratio: Banks are mandated to reserve a certain percentage of their cash reserves or RBI-approved assets. There are two types of reserve ratios:
    • Cash Reserve Ratio (CRR): Banks must set aside this portion in cash with the RBI, which cannot be lent to others or earn any interest or profit.
    • Statutory Liquidity Ratio (SLR): Banks are required to allocate this portion in liquid assets such as gold or RBI-approved securities like government bonds. Although banks can earn interest on these securities, the rates are typically low.
  2. Open Market Operations (OMO): To manage the money supply, the RBI engages in buying and selling government securities in the open market. These transactions, conducted by the Central Bank, are known as Open Market Operations. When the RBI sells government securities, it drains liquidity from the market, whereas buying securities injects liquidity. OMOs are primarily aimed at addressing temporary liquidity imbalances in the market resulting from foreign capital flows.

Qualitative Tools

Unlike quantitative tools, qualitative tools have a targeted impact on the money supply within specific sectors of the economy.

  1. Margin Requirements: The RBI sets specific margins against collateral, influencing the borrowing behavior of customers. When the RBI raises margin requirements, customers can borrow less.
  2. Moral Suasion: Through persuasion, the RBI encourages banks to invest in government securities rather than specific sectors.
  3. Selective Credit Control: This involves controlling credit by refraining from lending to certain industries or speculative businesses.

Policy Rates

Policy rates like the Bank rate and Liquidity Adjustment Facility (LAF) rates, including Repo rate, Reverse Repo rate, and Marginal Standing Facility (MSF) Rate, influence borrowing and lending activities in the economy.

Monetary Policy Transmission

Despite RBI’s efforts, challenges persist in transmitting policy changes effectively. Initiatives to enhance transmission mechanisms are underway, aiming to ensure that policy decisions reach borrowers and lenders alike.

Dear Money Policy or Contractionary Monetary Policy

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Under this policy, interest rates rise to curb money supply, leading to reduced business expansions and employment opportunities. This policy, while essential for controlling inflation, can impact economic growth adversely.

Fiscal Policy

In tandem with monetary policy, fiscal policy, managed by the finance ministry, focuses on government expenditure and revenues, playing a vital role in economic stability.

Conclusion

RBI’s recent repo rate hike underscores its commitment to taming inflation. However, striking a balance between growth and stability remains a formidable task amid global uncertainties.

FAQs on RBI Monetary Policy 2023

  1. What is the RBI policy rate today? The RBI policy rate stands at 6.50% as of 23 November 2023.
  2. What are the present RBI rates in 2023? Repo rate, reverse repo rate, and Marginal Standing Facility Rate stand at 6.50%, 3.35%, and 6.75%, respectively.
  3. What is the latest monetary policy rate? The latest monetary policy rate is 6.50%, raised from 6.25% in February 2023.
  4. What is the new monetary policy? The new monetary policy maintains RBI rates at 6.50%, with key highlights including a cumulative repo rate hike of 250 bps.
  5. How often does RBI release monetary policy? RBI releases its monetary policy report once every six months, providing insights into inflation forecasts and economic trends.