What's New :
ITS 2025: Integrated Test Series & Mentorship Program for Prelims and Mains. Get Details
20th April 2024 (18 Topics)

Conditions not ripe for easing restrictive monetary stance


The recent meeting of the Monetary Policy Committee (MPC) highlighted the need to maintain a restrictive monetary stance due to persistent risks to price stability, as outlined by RBI Deputy Governor Michael Debabrata Patra.

Key Highlights of the Meeting
  • Inflation Concerns: Recent inflation data, especially in food prices, indicates ongoing risks. Food inflation, which remained at 8.52% in March, shows resilience, particularly in cereals and meat.
  • Price Momentum: Experts pointed out a build-up of price momentum with rising temperatures as summer approaches, indicating potential challenges until May 2024.
  • Headline Inflation: Despite some disinflation in core areas and fuel, headline inflation might remain on the higher side until favorable base effects kick in during the second quarter of 2024-25.
1: Dimension - Reasons for Maintaining Restrictive Stance
  • Persistent Inflation Risks: The steady core disinflation and fuel price de-escalation do not ensure a quick alignment of headline inflation with the target. Until significant base effects are seen, maintaining a restrictive stance is crucial.
  • Uncertainty in Inflation Trajectory: Experts stressed the importance of maintaining downward pressure on inflation until clearer signs of a durable decline in inflation are evident and uncertainties in the near term are resolved.
2: Dimension - Impact of Loose Monetary Policy
  • Inflationary Pressure: Loose monetary policy could fuel inflationary pressures, particularly with the vulnerability of the inflation trajectory to frequent supply-side shocks, especially in food inflation due to adverse weather conditions.
  • Price Stability Concerns: RBI Governor emphasized the need to remain focused on ensuring durable price stability, highlighting the risks associated with supply-side shocks spilling over into core inflation.
3: Dimension - Required Measures
  • Balancing Growth and Inflation: Any relaxation in the monetary stance should be contingent on a durable decline in inflation and a more balanced risk outlook, ensuring that it doesn't compromise the objective of maintaining price stability.
  • Enhanced Confidence: Experts mentioned that a stronger revival in private consumption and corporate sales growth requires greater confidence in a sustained decline in inflation.

Mains Practice Question

Q: “Inflation remains a persistent challenge despite various measures”. Discuss the factors contributing to this and suggest strategies for effective inflation management.

Key-terms in the monetary policy review

Repo rate

  • Repo rate is an interest rate at which the RBI provides liquidity under the liquidity adjustment facility (LAF) to banks against the collateral of government and other approved securities.
  • Currently, the repo rate is at 6.50 percent.

Standing Deposit Facility (SDF) Rate

  • SDF rate is a rate at which the RBI accepts uncollateralised deposits, on an overnight basis, from banks.
  • The SDF is also a financial stability tool in addition to its role in liquidity management. The SDF rate is placed at 25 basis points below the policy repo rate.
  • Currently, SDF rate is at 6.25 percent.

Marginal Standing Facility (MSF) Rate

  • The penal rate at which banks can borrow, on an overnight basis, from the central bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2 per cent).
  • MSF rate currently stands at 6.75 percent.

Fine Tuning Operations

  • The main liquidity operation is supported by fine-tuning operations, overnight and/or longer tenor, to tide over any unanticipated liquidity changes during the reserve maintenance period.
  • In addition, the RBI conducts, if needed, longer-term variable rate repo/reverse repo auctions of more than 14 days.

Monetary policy stance

There are various stances:

  • Accommodative Stance, which means the central bank is prepared to expand the money supply to boost economic growth.
  • Neutral stance suggests that the central bank can either cut rate or increase rate. This stance is typically adopted when the policy priority is equal on both inflation and growth.
  • Hawkish stance indicates that the central bank’s top priority is to keep the inflation low. During such a phase, the central bank is willing to hike interest rates to curb money supply and thus reduce the demand.
  • Calibrated tightening means during the current rate cycle, a cut in the repo rate is off the table.

CPI Inflation

  • Consumer Price Index (CPI) based Inflation is a measure of changes in the price levels of goods and services purchased by households.

Verifying, please be patient.

Enquire Now