The Reserve Bank of India
(RBI) governor Shaktikanta Das is set to announce the bi-monthly policy on
Thursday, with expectations leaning towards a continued pause on the key
interest rate, given that inflation persists near the upper tolerance level of
6 per cent.
What is
MPC?
The Monetary Policy committee is entrusted with the responsibility of
deciding the policy repo rate to achieve the inflation target, keeping in mind
the objective of growth. It consists of three external members and three
officials of the RBI.
The external members of the panel are Shashanka Bhide, Ashima
Goyal, and Jayanth R Varma. Besides Governor Das, the other RBI officials in
MPC are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra.
The upcoming RBI Monetary Policy announcement on February 8th holds significant weight, arriving shortly after the Union Budget unveiling and amidst evolving economic dynamics. While experts largely anticipate a status quo on the repo rate, other crucial aspects like stance, growth forecasts, and liquidity measures warrant close scrutiny. Let's delve deeper into these key areas and explore their potential ramifications:
1. Repo Rate: Beyond the Number, Watch the Nuances:
Though economists widely predict no change in the 6.5% repo rate, the accompanying commentary will be crucial. Any hints towards future rate adjustments, either hawkish or dovish, can significantly sway market sentiment. A hawkish tilt could indicate concerns about persistent inflation, leading to potential tightening measures in the future.
Conversely, a dovish undertone might suggest confidence in inflation control and open the door for future rate cuts.
2. Monetary Policy Stance: From "Withdrawal" to "Neutral" – A Pivotal Shift?:
Currently, the stance reflects a "withdrawal of accommodation," signifying the MPC's focus on curbing inflation. A shift to "neutral" would signal growing confidence in the economy's stability and potentially pave the way for future accommodative actions. While not necessarily implying immediate rate cuts, it would mark a significant shift in the central bank's posture.
3. GDP Growth Target: More Than Just a Number:
The MPC's revised GDP growth forecast for 2023-24 will be keenly observed. An upward revision would reflect optimism about the economy's resilience, potentially boosting investor confidence and business activity. Conversely, a downward revision could indicate concerns about headwinds like global uncertainties or domestic challenges, tempering growth expectations.
4. Inflation Target: Balancing Act Between Growth and Stability:
The December inflation figure offered some relief, falling below expectations. However, the MPC faces a delicate balancing act.
Maintaining the current 5.4% target might prioritize containing inflation but could restrict growth potential. Lowering the target could signal confidence in inflation control and pave the way for future growth-supportive measures, but carries the risk of exceeding the revised target if inflationary pressures resurface.
5. Liquidity Measures: Tightening the Taps or Loosening the Grip?:
The RBI's stance on liquidity will critically impact borrowing costs and economic activity. Continued tight liquidity, while managing inflation,
could constrain credit flow and dampen growth. Conversely, loosening the grip could stimulate growth but reignite inflation concerns. The RBI's approach will reflect its judgment on the trade-off between these competing priorities.
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