Saturday, June 15, 2024

RBI’S Monetary Policy: Decoding The Elephant In the Room

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Recently, the RBI’S MPC (monetary policy committee) headed by Governor Shaktikanta Das met. The meetings started from April 3 onwards and during these meetings the RBI’S MPC voted by a 5:1 majority to keep the repo rate unchanged at 6.50 percent.

Interestingly, during these meetings, RBI Governor, Shaktikanta Das had said that the “Elephant has now gone out for a walk.” But what did he mean by the elephant?

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CPI Inflation-

According to Governor Shaktikanta Das, two years back, the elephant was the Inflation in the room. At that time, the inflation was at 7.8 percent that is in April 2022. Continuing forward, he said that now the elephant has gone out for a walk but we would like the elephant to return to the forest and remain there on a durable basis.

In other words, Inflation is necessary evil. It plays an essential role and is at times beneficial for the economy. By making a metaphorical comparison with Elephant, Shaktikanta Das, wanted to convey that the CPI inflation continues to moderate and aligns with the target.

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The governor said, “The success in the disinflation process so far should not distract us from the vulnerability of the inflation trajectory to the frequent incidence of supply-side shocks.”

According to the RBI, uncertainty surrounding food prices might weight on inflation trajectory going forward. However, it believes that record Rabi wheat output would help replenish buffer stock thereby reducing price pressure. Furthermore, an early monsoon in the season is a positive omen for the kharif season.

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Overall, Retail inflation, or inflation based on the Consumer Price Index, is predicted to be 4.5% for FY25; Q1 is expected to be 4.9%, Q2 to be 3.8%, Q3 to be 4.6%, and Q4 to be 4.5%.

Repo Rate and Stance-

By a vote of 5 to 1, the RBI’S Monetary Policy Committee (MPC) decided to maintain key rates at 6.5%.

Thus, the Bank rate, the Marginal Standing Facility (MSF) rate is kept at 6.75 % and the Standing Deposit Facility (SDF) rate remains at 6.25%.

According to Das, the MPC concluded, with a majority of five out of six members, to remain focused on the “withdrawal of accommodation” in order to ensure that inflation gradually aligns with the target while supporting growth.

Growth Outlook-

The Reserve Bank of India has forecast a 7% real GDP growth rate for FY25. It increased the Q2FY25 GDP growth target to 6.9 percent from 6.8 percent previously. It lowered the Q1FY25 GDP growth target to 7.1 percent from the previously projected 7.2 percent. Overall, the RBI maintained the GDP growth target for Q3FY25 at 7%, while it has raised the GDP growth target for Q4FY25 from 6.9% to 7%.

According to the RBI, in FY 2024–2025, consumption will boost economic development, with rural demand catching up as urban consumption continues to rise.

Shaktikanta Das said, “Strengthening of rural demand, improving employment conditions and informal sector activity, moderating inflationary pressures and sustained momentum in manufacturing and services sector should boost private consumption.”

Liquidity Coverage Ratio Framework-

The RBI has suggested reviewing the liquidity coverage ratio (LCR) framework and has stated that it will soon release a draft circular for stakeholder consultation.

In his speech, Governor Das made the point that a thorough review of the LCR framework for banks is necessary because advances in technology have made it possible for bank customers to instantaneously withdraw or transfer money from their accounts, which could create challenges for banks.

 

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