9th February 2024 (11 Topics)

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RBI’s Monetary Policy Committee Takeaway

Context

The Reserve Bank of India’s Monetary Policy Committee (MPC), in its sixth meeting, maintained a status quo on the repo rate. In another significant step, it extended the Key Fact Statement (KFS) requirements to cover all retail and MSME loans.

Key-Takeaways:

The Reserve Bank of India’s Monetary Policy Committee has decided to keep the policy repo rate unchanged at 6.5%.
CPI for FY24 is projected at 5.4%, while its likely to be at 4.5% in FY25. RBI has pegged real GDP growth for FY25 at 7%.
Retail inflation to average 5.4% this fiscal, to come down to 4.5% in FY25
Monetary transmission by financial institutions still remains incomplete
Current economic momentum to sustain in the next fiscal
RBI to introduce an offline functionality in CBDC-Retail for transactions in areas with poor or limited internet connectivity.
RBI will review regulatory framework for electronic trading platforms to enable market makers access offshore ETPs offering permitted Indian Rupee products
RBI asked lenders to provide key fact statement (KFS) about the terms of the loan agreement, including all-inclusive interest cost, to borrowers for retail as well as MSME loans

What Is the Key Fact Statement (KFS)?

The KFS is a concise document that provides borrowers with essential information about their loan agreements. It serves as a financial compass, guiding borrowers through the intricacies of borrowing.
All-Inclusive Interest Rate: The KFS includes the actual annualized interest rate, which encompasses not only the base interest but also any additional charges, fees, and penalties associated with the loan.
The change: The Key Fact Statement (KFS) requirements now cover all retail and MSME loans. Previously, this mandate was applicable only to specific categories of lenders, but now it applies across the board. Let’s break down what this means and why it matters:

Why Is the KFS Important?

Transparency: Borrowers often skim through lengthy loan documents, missing critical details. The KFS ensures transparency by spotlighting the complete cost of borrowing. Whether it’s processing fees, documentation charges, or penalties, borrowers will know exactly what they’re paying for.
Empowering Borrowers: Armed with this knowledge, borrowers can compare loan offers effectively. They’ll be better equipped to choose the most suitable loan for their needs.

What Is the Monetary Policy?

Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act. The amended RBI Act, 1934 also provides for the inflation target (4% +-2%) to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.
The Urjit Patel Committee proposed the idea of an MPC, aiming for transparency and accountability.

What is Monetary Policy Committee(MPC):

Objective: The MPC’s primary responsibility is to set the repo rate, which serves as the key policy instrument for managing inflation. Currently, the RBI aims to maintain an inflation target of 4%.
Composition: The committee comprises six members:
Three officials from the RBI: These internal members bring expertise in monetary matters.
Three external members: Nominated by the Indian government, these experts contribute diverse perspectives.
Decision-Making Process:
- The MPC convenes at least four times a year (quarterly) to deliberate on monetary policy.
- After each meeting, it publishes its decisions, ensuring transparency and accountability.
- During the “silent period” (seven days before and after rate decisions), utmost confidentiality is maintained.
Inflation Targeting
- The current mandate of the MPC is to maintain 4% annual inflation until 31 March 2026.
- The upper tolerance for inflation is 6%, while the lower tolerance is 2%.
Governor’s Role: The RBI Governor serves as the ex-officio chairperson of the MPC. In case of a tie, the Governor has the casting vote.
Role of the Reserve Bank
- The Monetary Policy Department (MPD) assists the MPC in formulating monetary policy.
- Views from key stakeholders and analytical work contribute to policy decisions.
The Financial Markets Operations Department (FMOD) operationalizes monetary policy through liquidity management.

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RBI’s Monetary Policy Committee Takeaway

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