RBI Governor Shaktikanta Das announced MPC ’s key decisions; a move to decrease high inflation
The war in Europe is lingering and newer challenges are coming every day, disrupting supply chains and leading to high inflation and demand-supply imbalances, RBI Governor Shaktikanta Das said. During these challenging times, the Indian economy has remained resilient, recovery has gained momentum despite pandemic and war; however, inflation has deeply increased, primarily due to a series of supply shocks linked to the war, he added.
To decrease high inflation and minimize the impacts of geopolitical tensions, RBI Governor Shaktikanta Das announced MPC (Monetary policy committee)’s key decisions regarding key interest rates, CRR & policy amendments today.
On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 percent with immediate effect.
As a result, the standing deposit facility (SDF) rate is reduced to 4.65 percent, while the marginal standing facility (MSF) rate and bank rate are reduced to 5.15 percent.
The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth.
The move comes after the central bank raised the repo rate, the main policy rate, by 40 basis points to 4.40 percent in a surprise off-cycle meeting last month to combat high inflation and the impact of geopolitical tensions.
According to NSO provisional estimates released on May 31, India’s GDP growth in 2021-22 is estimated at 8.7%, higher than pre-pandemic level; recovery in domestic activity remains firm, with growth impulses being broadbased. Real GDP growth for 2022-23 is estimated at 7.2%. Q1 – 16.2%, Q2 – 6.2%, Q3 – 4.1%, Q4 – 4.0% RBI Governor Shaktikanta Das said.
Apart from that a normal monsoon is expected and it will boost rural consumption. Rebound in contact intensive services will sustain urban consumption. RBI surveys suggest further improvement in consumer confidence and household optimism.
Effect of the Announcement-
Among the global concerns caused by the Ukraine Crisis, the RBI has navigated a delicate situation of rising prices, slowing growth, and reducing liquidity. This will help in the control of inflation and the smoothing of economic growth.
The inflation rate has been above 6% for a few months, which is outside the RBI’s safe zone. Inflationary pressures, if not contained, could undermine an otherwise healthy Indian economy.
Repo Rate and Reverse Repo Rate-
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country.
If these rates rise, home loans and EMIs will become more expensive. Those who chose floating EMIs would have to pay more money until the RBI lowers interest rates.
Monetary Policy
Monetary policy is a policy implemented by the central bank (RBI) to control the amount of money in the economy and thus combat both inflation and deflation. It helps maintain price stability and achieves high economic growth.
