The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept the repo rate – the rate at which RBI lends to banks – unchanged at 6.50%. While the decision to keep repo rate unchanged was decided by a 4 to 2 majority, the MPC unanimously agreed on continuing with its ‘neutral’ policy stance “to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.”
“High inflation reduces the disposable income in the hands of consumers and dents private consumption, which negatively impacts the real Gross Domestic Product (GDP) growth. The increasing incidence of adverse weather events, heightened geo-political uncertainties and financial market volatility pose upside risks to inflation. The MPC believes that only with durable price stability can strong foundations be secured for high growth,” RBI Governor Shaktikanta Das said in a statement.
The MPC is a six-member empowered committee constituted by the central government and comprises the RBI Governor, a Deputy Governor, an officer of the RBI, an economist and two independent members appointed by the government. All MPC members have one vote, and in the event of an equality of votes, the Governor has a second or casting vote. All members of the MPC are required to write a statement specifying the reasons for voting in favour of, or against the proposed resolution.
Along with leaving the repo rate unchanged, the MPC also announced a decision to reduce the cash reserve ratio (CRR) of banks to 4.0% from 4.50%. CRR requires banks to maintain a certain percentage of their total deposits as liquid reserves with the RBI. By adjusting CRR, the RBI is able to influence money available for lending in the banking system.
“This reduction in the CRR is consistent with the neutral policy stance and would release primary liquidity of about ₹1.16 lakh crore to the banking system,” Das said.
It is important to note that along with these measures, the MPC also revised its annual real Gross Domestic Product (GDP) target for FY24-25 to 6.6% from the earlier 7.2%. Q2 FY 24-25 real GDP numbers were at a seven-quarter low of 5.4%. Consumer Price Index (CPI) inflation target for FY 24-25 has also been raised to 4.8% from 4.5%.
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