Decisions Of Monetary Policy Committee:
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has recently opted to maintain the policy repo rate at 6.5%, while simultaneously revising its projection for retail inflation in the current fiscal year (2023-24).
- Additionally, a temporary 10% Incremental Cash Reserve Ratio (I-CRR) is imposed on banks to absorb excess liquidity.
- Repo Rate Unchanged: The RBI decided unanimously to keep the policy repo rate unchanged at 6.5% to balance economic growth and inflation control.
- Inflation Projection Increased: The projection for retail inflation in the current fiscal year has been raised by 30 basis points to 5.4%.
- This adjustment acknowledges the upward trend in headline inflation, driven in part by rising vegetable prices.
- While the spike in vegetable prices is expected to be temporary, external factors like possible El Nino weather conditions and global food prices pose potential risks.
- Projected GDP Growth: The MPC retained its projection for real GDP growth in 2023-24 at 6.5%.
- Incremental Cash Reserve Ratio (I-CRR): Effective from 12th August 2023, scheduled banks are required to maintain an I-CRR of 10% on the net increase in their demand and time liabilities between May 19, 2023, and July 28, 2023.
- This move aims to absorb surplus liquidity, particularly due to the recent demonetisation of Rs. 2000 notes.
- The RBI opted for I-CRR over a general CRR increase to prevent penalizing banks for their current deposits and to limit impacts on credit growth and the economy.
- A CRR rise would have restricted loan funds and raised borrowing costs. I-CRR only targets excess liquidity from demonetization without disrupting regular banking operations.
- The existing CRR remains unchanged at 4.5%.
