Monetary Policy Review April 2024

News Excerpt:

The RBI Governor Shaktikanta Das announced the first monetary policy of the financial year 2024-25. The policy broadly mirrored the last policy in both its tone and action.

Highlights of the policy:

  • RBI decided to keep the key policy repo rate — the rate at which RBI lends money to banks to meet their short-term funding needs — unchanged for the seventh consecutive time at 6.5 percent as retail inflation continues to be above its target of 4%. 
    • Uncertainties surrounding the food inflation trajectory have kept the monetary policy committee’s hands tied for a rate revision. 
  • It also decided to maintain the stance at ‘withdrawal of accommodation’.
  • India’s real GDP growth for FY25 is projected at 7%. 
  • CPI inflation for FY25 is estimated at 4.5%.
  • India's forex reserves reached an all-time high of USD 645.6 billion as of March 29.
  • With rural demand catching up, consumption is expected to support economic growth in FY25.
  • Outlook for agriculture, rural activity appears bright, with good rabi wheat crops and improved prospects of kharif crops, due to the expected normal monsoon.
  • Strong rural demand, moderating inflationary pressures, and sustained momentum in the manufacturing and services sector will boost private consumption.
  • The headwinds from protracted geopolitical tensions and increasing disruptions in trade routes, however, pose risks to the outlook.
  • Strong growth momentum, along with GDP projections for 2024-25, gives RBI the policy space to unwaveringly focus on price stability.
  • Net inflows by Foreign Portfolio Investors (FPI) stood at $41.6 billion during 2023-24, the second highest level of FPI inflow after 2014-15.
  • India continues to be the largest recipient of remittances in the world.
  • Current Account Deficit in 2024-25 to remain at a level that is both viable and eminently manageable.

Other announcements:

  • Trading of Sovereign Green Bonds permitted in the International Financial Services Centre (IFSC).
  • Introduction of a mobile app to access RBI’s Retail Direct Scheme for participation in the G-Sec market.
  • To allow cash deposits in banks through UPI.
  • UPI access for Prepaid Payment Instruments (PPIs) through third-party applications
  • To allow non-bank payment system operators to offer Central Bank Digital Currency (CBDC) wallets.
  • Dealing in rupee interest rate derivate products for all small finance banks
  • No change in RBI's foreign exchange risk management policies. Regulations of the Foreign Exchange Management Act (FEMA) clearly state that exchange-traded currency derivatives "are for hedging only".

About the Monetary Policy Framework:

  • Under the Reserve Bank of India, Act,1934 (as amended in 2016), RBI is entrusted with the responsibility of conducting monetary policy in India.
  • In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
  • Under Section 45ZA, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in five years and notifies it.
  • On March 31, 2021, the Central Government retained the inflation target and the tolerance band (4+- 2%) for the next 5-year period – April 1, 2021 to March 31, 2026.

About the Monetary Policy Committee:

  • Section 45ZB of the amended RBI Act, 1934 provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government. 
  • The MPC determines the policy repo rate required to achieve the inflation target.
  • The MPC is required to meet at least four times in a year. 
  • The quorum for the meeting of the MPC is four members.
  • Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
  • Each Member of the Monetary Policy Committee writes a statement specifying the reasons for voting in favor of, or against the proposed resolution.

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