The RBI Keeps interest rates unchanged

Source: The post the RBI Keep interest rates unchanged has been created, based on the article “The MPC has done well to keep policy interest rates unchanged” published in “Live mints” on 10th June 2024

UPSC Syllabus Topic: GS Paper3-economy-mobilisation of resources, growth, development

Context: The article discusses the Reserve Bank of India’s decision to keep interest rates unchanged due to stable economic growth but persistent inflation. It also explores the influence of recent election results on monetary policy, despite official claims of central bank independence from politics.

For detailed information on Monetary Policy Committee read this article here

What was the decision of the RBI’s Monetary Policy Committee?

1. The RBI’s Monetary Policy Committee (MPC) decided to keep interest rates unchanged for the eighth time.
2. The decision was influenced by strong GDP growth, estimated at 8.2% for 2023-24.
3. Inflation concerns persist, preventing a rate cut.
4. Two MPC members, Ashima Goyal and Jayanth Varma, called for a 25 basis points cut, but were outvoted.
5. The RBI focuses on withdrawing liquidity to stabilize inflation and support sustainable economic growth.

For detailed information on Factors influencing RBI’s monetary policy stand read this article here

What challenges does the RBI face with fiscal policy?

1.Conflict of Roles: RBI manages both monetary policy and government debt, which can conflict. For example, monetary policy might demand higher interest rates, while the government seeks to borrow at lower rates.

2.Fiscal Dominance: Post-COVID-19, RBI kept interest rates low longer than warranted to support government borrowing. The RBI intervened to keep 10-year government securities yields below 6%, calling it a “public good.”

3.Political Influence: The recent Lok Sabha elections left the BJP without a majority, making it reliant on coalition partners. This political scenario could pressure the government to increase spending, affecting fiscal consolidation goals.

What are the future prospects for India’s economy according to the RBI?

1. The RBI projects GDP growth for 2024-25 at 7.2%, higher than the previous 7% estimate.
2. Inflation remains a concern, as it hasn’t stabilized at the 4% target.

3. The MPC has kept interest rates unchanged for the eighth consecutive time.

4. Governor Shaktikanta Das emphasizes that “sustained price stability” is crucial for high growth.

Question for practice:

Examine the factors influencing the Reserve Bank of India’s decision to keep interest rates unchanged for the eighth consecutive time.