RBI MPC Maintains Status Quo, Focuses on Withdrawal of Accommodation
The RBI's Monetary Policy Committee (MPC) kept the repo rate unchanged, reiterating its focus on withdrawing accommodation to align inflation with the target.
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The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has decided to maintain the status quo on the repo rate, keeping it unchanged. This decision signals a continued focus on 'withdrawal of accommodation,' meaning the RBI intends to gradually reduce the amount of liquidity in the banking system to control inflation. The MPC's primary objective remains aligning inflation with the 4% target while supporting growth.
This approach indicates that while inflation has shown signs of easing, the RBI is not yet ready to cut rates and remains cautious about persistent price pressures. The decision impacts borrowing costs for banks and consumers, influencing overall economic activity.
Key Facts
RBI MPC maintained status quo on the repo rate.
Focus remains on 'withdrawal of accommodation'.
Objective: align inflation with 4% target while supporting growth.
Indicates caution on persistent price pressures.
UPSC Exam Angles
Understanding the mandate and composition of the Monetary Policy Committee (MPC).
Grasping various monetary policy instruments (repo rate, CRR, SLR, OMO, MSF, LAF) and their impact on liquidity and inflation.
Analyzing the 'withdrawal of accommodation' stance and its implications for the economy.
Connecting monetary policy decisions with broader economic indicators like inflation, GDP growth, and financial stability.
Differentiating between various monetary policy stances (accommodative, neutral, tightening, hawkish, dovish).
The Flexible Inflation Targeting (FIT) framework and its effectiveness.
More Information
Background
The Reserve Bank of India (RBI) adopted a flexible inflation targeting (FIT) framework in 2016, with a primary objective to maintain price stability while keeping in mind the objective of growth. The target inflation rate is 4% with a +/- 2% tolerance band.
The Monetary Policy Committee (MPC) was constituted to make decisions on the policy repo rate to achieve this target. Historically, RBI's monetary policy has evolved from a multiple indicator approach to a more focused inflation targeting regime.
Latest Developments
Practice Questions (MCQs)
1. Consider the following statements regarding the Reserve Bank of India's (RBI) 'withdrawal of accommodation' stance: 1. It primarily aims to reduce the amount of liquidity in the banking system. 2. This stance typically involves cutting the policy repo rate to stimulate economic growth. 3. The objective is to align inflation with the targeted range while supporting growth. Which of the statements given above is/are correct?
- A.1 only
- B.1 and 3 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Statement 1 is correct. 'Withdrawal of accommodation' means reducing excess liquidity. Statement 2 is incorrect. Cutting the policy repo rate is an accommodative stance, aimed at stimulating growth by making borrowing cheaper. Withdrawal of accommodation typically involves maintaining or hiking rates, or using other liquidity absorption measures. Statement 3 is correct. The primary objective of the MPC, even with withdrawal of accommodation, is to achieve the inflation target while being mindful of growth.
2. With reference to the Monetary Policy Committee (MPC) in India, consider the following statements: 1. The MPC is a six-member body, with three members appointed by the Government of India and three by the Reserve Bank of India. 2. The Governor of the Reserve Bank of India is the ex-officio Chairperson of the MPC and holds a casting vote in case of a tie. 3. The primary objective of the MPC is to maintain price stability while keeping in mind the objective of growth. Which of the statements given above is/are correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show Answer
Answer: D
Statement 1 is correct. The MPC comprises six members: three officials of the RBI (Governor, Deputy Governor in charge of monetary policy, and one officer nominated by the Central Board) and three external members appointed by the Central Government. Statement 2 is correct. The RBI Governor is indeed the ex-officio Chairperson and has a casting vote in case of a tie. Statement 3 is correct. As per the RBI Act, 1934, the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.
3. Consider the following monetary policy tools and their likely impact on liquidity in the banking system: 1. Increase in Cash Reserve Ratio (CRR): Decreases liquidity 2. Open Market Operations (OMO) involving sale of government securities: Increases liquidity 3. Decrease in Repo Rate: Encourages borrowing and potentially increases liquidity Which of the pairs given above is/are correctly matched?
- A.1 only
- B.1 and 3 only
- C.2 and 3 only
- D.1, 2 and 3
Show Answer
Answer: B
Pair 1 is correctly matched. An increase in CRR requires banks to hold a larger portion of their deposits with the RBI, thus reducing the lendable funds and decreasing liquidity in the system. Pair 2 is incorrectly matched. OMO involving the *sale* of government securities by the RBI absorbs liquidity from the banking system as banks pay for these securities. OMO involving the *purchase* of government securities injects liquidity. Pair 3 is correctly matched. A decrease in the Repo Rate makes it cheaper for banks to borrow from the RBI, which encourages them to borrow more, thereby increasing the overall liquidity available for lending and investment.
4. In the context of the Reserve Bank of India's monetary policy, a 'hawkish' stance typically implies: 1. A focus on controlling inflation, even at the cost of slower economic growth. 2. A preference for lower interest rates to stimulate investment and consumption. 3. An expectation of future rate hikes or continued tight liquidity measures. Which of the statements given above is/are correct?
- A.1 only
- B.1 and 2 only
- C.1 and 3 only
- D.2 and 3 only
Show Answer
Answer: C
Statement 1 is correct. A 'hawkish' stance prioritizes inflation control, often by tightening monetary policy, which can lead to slower economic growth. Statement 2 is incorrect. A preference for lower interest rates to stimulate growth is characteristic of a 'dovish' stance. A hawkish stance typically involves higher interest rates. Statement 3 is correct. A hawkish stance signals the central bank's readiness to raise interest rates or maintain tight liquidity conditions to curb inflation.
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