Why in news?

The Reserve Bank of India (RBI) announced its fourth bi-monthly monetary policy for FY25 on October 9, 2024.

The RBI’s Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 6.5%, marking the tenth consecutive time the rate has remained steady. Five out of six MPC members voted in favour of maintaining the current rate.

What’s in today’s article?

• Monetary Policy Committee (MPC)
• Current domestic and global situation
• Key highlights of the MPC meeting

Monetary Policy Committee (MPC)

• The Committee
  • Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee (MPC).
  • MPC will determine the policy interest rate required to achieve the inflation target. The first such MPC was constituted in September 2016.
• Members of MPC
  • As per the amended RBI act, the MPC shall consist of
    • the RBI Governor as its ex officio chairperson,
    • the Deputy Governor in charge of monetary policy,
    • an officer of the Bank to be nominated by the Central Board, and
    • three persons to be appointed by the central government.
• Functions of MPC
  • Setting Policy Interest Rates: The primary function of the MPC is to determine the policy interest rates, specifically the repo rate.
  • Inflation Targeting: The current inflation target set by the government is a Consumer Price Index (CPI) inflation target of 4% with a tolerance band of +/- 2%.
  • Economic Analysis and Forecasting: The MPC conducts thorough analysis and forecasting of various economic indicators, including inflation, GDP growth, employment, fiscal conditions, and global economic developments.
  • Decision-Making: The MPC meets at least four times a year to review the monetary policy stance.

Current domestic and global situation against which the MPC meeting was held

• Domestic growth has continued its strong momentum, and the global economy has shown resilience since the last meeting.
• However, risks remain due to geopolitical conflicts, financial market instability, and high public debt.
• On the bright side, world trade is showing signs of recovery.

Key highlights of the MPC meeting

• Key Policy rates remain unchanged
  • Repo Rate - The repo rate now stands at 6.50 per cent.
    • Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds.
  • The standing deposit facility (SDF) - This rate stands at 6.25%.
    • The SDF is a liquidity window through which the RBI will give banks an option to park excess liquidity with it.
    • It is different from the reverse repo facility in that it does not require banks to provide collateral while parking funds.
    • The idea of an SDF was first mooted in the Urjit Patel Monetary Policy Committee report in 2014.
    • It later received the government’s nod following an amendment to the RBI Act in 2018, vide the Finance Bill.
  • The marginal standing facility (MSF) rate – It stands at 6.75%.
    • MSF is a window for banks to borrow from the central bank in an emergency situation when inter-bank liquidity dries up completely.
  • The Bank Rate - It is now 6.75%.
    • Bank rate is the rate charged by the central bank for lending funds to commercial banks.
    • There is a slight difference between Bank Rate and Repo Rate. In Repo Rate, RBI lends money to the banks against securities for the short term only.
• Policy stance changed
  • The RBI has changed its policy stance changed to ‘Neutral’ from ‘Withdrawal of Accommodation’.
    • Withdrawal of accommodation - It means reducing the money supply in the system to control inflation. It rules out the option of cutting rates.
    • Neutral stance - This means that the central bank is open to either increasing or decreasing interest rates, depending on data related to inflation and economic growth.
• GDP projection
• India’s real GDP grew by 6.7 per cent in Q1.
• For FY25, the RBI kept its gross domestic product (GDP) projection unchanged at 7.2 per cent.
• Inflation projection
  • The MPC projected inflation at 4.5 per cent for FY25, the same as previously forecast.
  • The RBI reported that headline inflation dropped significantly to 3.6% in July and 3.7% in August from 5.1% in June.
  • However, the RBI warned that September inflation could rise due to adverse base effects and higher food prices, though food inflation is expected to ease by Q4 FY25 with better kharif and rabi harvests.
  • Core inflation is likely to remain contained, influencing the RBI’s shift to a 'Neutral' policy stance.
  • Despite efforts to control inflation, risks such as unfavorable weather, geopolitical tensions, and rising food and metal prices could push inflation higher in the coming months.
• Reserve Bank Climate Risk Information System (RB-CRIS)
  • The RBI proposed to create a climate risk data repository, the RB-CRIS, to address gaps in climate-related data.
  • It will have two parts: a publicly accessible web-based directory of data sources like meteorological and geospatial information, and a data portal with standardized datasets available only to regulated entities in phases.
• Enhancement of transaction and wallet limits for UPI
  • UPI Lite Wallet Limit Increased
    • The RBI has increased the UPI Lite wallet limit from Rs 2,000 to Rs 5,000 and per-transaction limit for the same from Rs 500 to Rs 1,000.
    • UPI Lite operates without using real-time core banking systems, while ensuring risk mitigation.
    • UPI Lite is a simplified version of UPI that lets users make small transactions without a UPI PIN.
  • UPI123 Pay Transaction Limit Enhanced
    • The per-transaction limit for UPI123 Pay has been increased to ₹10,000 from ₹5,000. This feature is now available in 12 languages, broadening accessibility.
    • UPI 123PAY is a payment system mainly for non-smart phone/feature phone user by which they can make payment using UPI without Internet in a safe and secure manner. 
• Beneficiary Account Name Look-up Facility
  • The RBI proposed a new ‘beneficiary account name look-up facility’ for RTGS and NEFT transactions.
  • This feature allows remitters to verify the beneficiary’s name by entering the account number and branch IFSC code, reducing the chances of incorrect transfers and fraud.
• Foreclosure Charges on MSE Loans Removed
  • To promote transparency and customer-centric lending, the RBI has banned foreclosure charges and pre-payment penalties on loans to micro and small enterprises (MSEs).
    • Foreclosure refers to the complete repayment of the outstanding loan amount before the end of the loan tenure.
      • E.g., If one takes a home loan for 10 years but decides to repay the entire loan in 5 years, the lender might charge a fee for doing so.
    • Pre-payment is when a borrower pays off a part of the loan early (in addition to regular monthly payments).
      • E.g., If you pay an extra ₹1 lakh towards your home loan principal, in addition to your regular EMI, the lender may impose a penalty for reducing the loan balance early.
    • Additionally, banks and NBFCs are prohibited from levying such charges on floating rate term loans to individuals for non-business purposes.