RBI's MPC increased interest rates By 0.25 By A 4-2 margin

The Repo Rate Increased For The Sixth Time In A Row To Reach 6.5%

The Reserve Bank of India's Monetary Policy Committee (MPC) increased interest rates by a 4-2 margin. The rate-setting panel decided to keep tightening policy, while choosing to keep an eye on the "accommodation" withdrawal in an effort to control inflation and promote growth. The repo rate increased for the sixth time in a row, rising by 0.25% to reach 6.5%. Following the final MPC meeting of that year in December 2022, the RBI increased the repo rate by 0.35 percentage points to 6.25%, the current rate. The repo rate increased for the fifth time in a row, reaching its highest level since March 2019. On the other hand, the reverse repo rate remained at 3.35%. 

What is Monetary Policy?

The monetary policy of the RBI is a set of tools and policies designed to protect and advance economic growth. One of the best tools a central bank can use to promote financial stability and economic growth is reviewing its monetary policy. In essence, monetary policies regulate the total amount of money that is made accessible to commercial banks and, indirectly, to end consumers and businesses.

The Components of Monetary Policy

Any monetary policy has two components: the choice of the repo rate and the "stance" of the policy. Changes in the repo rate impact the overall economy by determining whether loans for homes, automobiles, or factories will be more expensive or less affordable, but the MPC members' views on inflation and economic growth may be seen through their stance on policy. The posture has been focused on "removal of stimulus to ensure that inflation remains within the target moving forward, while supporting growth" as retail inflation has been outside RBI's comfort zone of 2% to 6% for 10 of the last 12 months. A 25 basis point increase in the repo rate, less than prior increases of 50 and 35 bps, indicated the MPC's belief that inflation has slowed down more quickly than expected. It also suggested that India's current cycle of interest rate increases, which started in May of last year after retail inflation reached an 8-year high of about 8% in April 2022, may be nearing its conclusion.

Hawkish Stance of MPC

The RBI's predictions for inflation and economic growth in India for the upcoming fiscal year may hold the key to finding the solution. The RBI projects that India's GDP would increase by 6.4% in FY24; however, the rate of growth will decline steadily over the year. While the RBI does not consider India's GDP growth to be its top priority, its forecast on inflation is more optimistic than what is generally believed. Through 2023–2024, the RBI projects retail inflation to be 5.3%, and it won't go below 5% in any of the next four quarters. The core inflation rate remains a concern for the RBI (or the rate of inflation when prices of food and fuel are taken out of the calculation). The fact that core inflation is averaging around 6% shows that the impact of rising food and gasoline prices has spread to the rest of the economy. Since food and fuel costs can fall as sharply as they rise, bringing down high core inflation typically requires more time than reducing headline inflation.

Monetary Stances By Other Countries

The aggressive posture of the US Fed (via the federal funds rate) currently appears to have developing market central banks in a corner, making it challenging to adopt a different monetary policy stance during these trying times. It is now more likely that the Fed will continue raising rates even after March in its fight against inflation because the US employment market is proving to be strong, as the most recent figures demonstrate. In light of this, there is a need for a more vigorous discussion on the timing and order of the monetary postures by nations around the world, particularly for rising economies. Depending on the dangers to GDP and price stability, different countries should have different exit strategies from the existing policies.

The Way Forward

The latest pronouncements by the monetary policy committee undoubtedly erred on the side of caution because they followed the 2023 Union Budget and major central banks' announcements of their monetary policies throughout the world. The MPC may have attained its aim by opting to raise rates while staying committed to the withdrawal of accommodation, clearing the ground for a sustained period of expansion. Mr. Das's unambiguous statement that monetary policy must be "tailored to ensuring a durable disinflation" correctly echoes a blog post by three IMF economists who recently cautioned that central banks must remain resolute as any "premature loosening" of policy risks a sharp resurgence in price gains that could leave countries vulnerable to further shocks. In the end, price stability is and must continue to be the cornerstone of a long-lasting economic recovery.