MONETARY POLICY - ECONOMY
News: ‘RBI
to guide inflation towards 4% target by 2024’
What's in the news?
● The
Reserve Bank of India's 2023 monetary policy objective is to hold inflation
within the mandated tolerance band and guide it towards the medium-term target of 4% by 2024,
officials said in an article published in the monthly bulletin.
Key takeaways from the article:
● The
first milestone of monetary policy
is being passed – bringing inflation into the tolerance band.
● The
second milestone is to tether
inflation within the mandated tolerance band and guide it towards the
medium-term target of 4% by 2024.
● Annual
retail inflation slowed to 5.72% in December, from 5.88% in the previous month,
dipping below 6% for a second straight month after having stayed above the
central bank's tolerance band of 2%-6% for 10 months.
Risks ahead:
● The
RBI officials said a slowdown in growth with possibilities of recession in
swathes of the global economy had become the baseline assessment even as
inflation might average well above target but emerging markets were appearing
more resilient now.
● The
biggest risks in 2023 will stem from U.S. monetary policy and the U.S. dollar.
Narrow Current Account Deficit:
● In
India, with inflation being brought within the RBI's tolerance band,
macroeconomic stability was getting bolstered and lead indicators were
suggesting that the current account deficit (CAD) too would narrow through the
rest of 2022 and 2023.
○ The
CAD had reached 4.4% of GDP in the July-September quarter of the current fiscal
year ending March, its worst since the June quarter of 2013.
Monetary policy of RBI:
Monetary policy is the process implemented by the central bank
to manage the money supply in order to achieve specific goals such as limiting
inflation, maintaining an appropriate exchange rate, creating jobs, and
promoting economic growth.
Objectives of Monetary Policy Framework:
● Price
stability
● Accelerating
growth of economy
● Exchange
rate stabilization
● Balancing
savings and investment
● Generating
employment
● Financial
stability
The
primary goal of monetary policy is to maintain
price stability while keeping growth in mind. Price stability is a
prerequisite for long-term growth.
Who will fix the monetary policy?
Monetary Policy Committee (MPC):
● The
Monetary Policy Committee now determines
the policy interest rate required to achieve the inflation target in India.
● The
MPC is a six-person committee appointed
by the Central Government (Section 45ZB of the amended RBI Act, 1934).
● The
MPC must meet at least four times per
year. The MPC meeting requires a quorum
of four members. Each MPC member has one vote, and in the event of a tie,
the Governor has a second or casting
vote.
● Following
the conclusion of each MPC meeting, the resolution adopted by the MPC is
published.
● The
Reserve Bank is required to publish a document called the Monetary Policy Report once every six months to explain:
○ the
sources of inflation
○ the
forecast of inflation for the next 6-18 months.