Monetary Policy Current Affairs

RBI Keeps the Repo Rate Unchanged

The Reserve Bank of India has kept repo rate unchanged at 6.25% in its second bi-monthly monetary policy review.

Reverse Repo rate has been kept unchanged at 6%.

The RBI has cut the Statutory Liquidity Ratio (SLR) by 50 basis points to 20%.

RBI has projected the headline inflation in the range of 2.0-3.5% in the first half of 2017-18 and 3.5-4.5% in the second half. According to the central bank, the implementation of GST is not expected to have material impact on overall inflation. It has observed that the 7th Pay Commission allowances, geo political, financial risk pose upside risk to inflation.

RBI has reduced the growth projection for the current fiscal to 7.3% from 7.4%.

The monetary policy decision has been taken by the six-member monetary policy committee (MPC).

The RBI has also revised its target for gross value added (GVA) by 10 basis points to 7.3%.

Background

SLR is the portion of bank deposits that have to be invested in government bonds. Components of SLR include cash in hand, gold owned by the bank, balance with RBI, Net balance in current account & Investment in Government securities. SLR has to be maintained at the close of business on every day.

Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate. The objective of Repo is to inject liquidity in the system. If RBI wants to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term. This is done by RBI selling government bonds / securities to banks with the commitment to buy them back at a future date.
GVA is another measure for economic growth.

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Union Government notifies constitution of Monetary Policy Committee

The Union Government has notified the constitution of the six members Monetary Policy Committee (MPC).

In this regard, the Union Finance Minister has used powers designated under the section 45ZB of the Reserve Bank of India (RBI) Act, 1934 to constitute MPC.

Composition of MPC

  • Urjit Patel: RBI Governor (Chairperson).
  • R Gandhi: Deputy Governor RBI in charge of Monetary Policy (Member).
  • Michael Patra: Executive Director of RBI (Member).
  • Chetan Ghate: Professor, Indian Statistical Institute (ISI) (Member).
  • Professor Pami Dua: Director, Delhi School of Economics (DSE) (Member).       
  • Ravindra H. Dholakia: Professor Indian Institute of Management (IIM), Ahmedabad (Member).

About Monetary Policy Committee (MPC)

  • The six member MPC has been entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
  • It will help in determining the Monetary Policy which in turn adds value and transparency to monetary policy decisions.
  • The meetings of the MPC will be held at least 4 times a year and it will publish its decisions after each such meeting.
  • The RBI Act was amended by the Finance Act, 2016 to provide for a statutory and institutionalised framework for MPC.
  • Composition of MPC: As per the provisions of the RBI Act, out of the six Members of MPC, three Members will be from the RBI and other three will be appointed by the Central Government.
  • Governor of RBI (ex officio Chairperson), Deputy Governor of RBI, in charge of Monetary Policy (Member), One officer of RBI (Member) and three members appointed by Central Government as members.

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