MPC MEET

India’s Monetary Policy Committee on 7th February 2019 decided to cut its benchmark repo rate by 25 basis points to 6.25 percent in response to lower-than-expected retail inflation the MPC has made several other changes as well to boost the economy and allow it to tackle its various other issues.
Before moving forward let us have an overview of the MPC and some of its tools.

What is MPC?

The Parliament passed the Finance Bill 2016 to make amendments to the RBI Act, 1934. It paved the way for the formation of the  MPC or Monetary Policy Committee.
Let’s start with a brief background. The Reserve Bank of India had appointed an expert committee in the year 2014 to reform the monetary policy framework in India.
It was led by Urjit Patel (Deputy Governor of RBI at that time)
The two major recommendations of the Urjit Patel committee were:

• The primary objective of the RBI should be to maintain inflation within a specific target (inflation targeting). It should abandon the practice of targeting multiple indicators like inflation, growth rate, exchange rate etc. This was adopted by India in 2016.
• A Monetary Policy Committee should be constituted to set India’s monetary policy.

What does the MPC do?

The Monetary Policy Committee of India is responsible for fixing the benchmark interest rate in India. The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.

• The main objective of the Monetary Policy Committee is to maintain inflation target, set up by the Central Government, in consultation with the RBI, every 5 years. The current inflation target is 4 %. This target can be relaxed by 2 %.
• The MPC has six members. Three are representatives of the RBI and three of the Central Government.
• The monetary policy decision is taken on the majority vote
• The RBI Governor has the casting vote in the event of a tie, that is, in case of a tie, he has to vote again.
• The three members who represent RBI are the Governor of RBI, the Deputy Governor of RBI and one executive officer nominated by the RBI.
• The other three members are appointed by the Central Government through a search committee. These members shall hold office for four years and are not eligible for reappointment.

What are the tools used by RBI?

1. Statutory Liquidity Ratio: It is the percentage of deposits that a bank has to invest in cash, gold or Government securities.  When Government increases SLR, the bank has to keep a larger percentage of its deposits in cash, gold and Government securities. It cannot lend this amount to consumers and businesses. Hence, the money supply decreases. (SLR ↑ ⇒ money supply ↓). This rate is currently 19.5% of deposits with the bank.
2. Cash reserves Ratio (CRR): It is the percentage of deposits that a bank has to keep as reserves with the RBI. When the Government increases CRR, the bank has to keep a larger percentage of its deposits as reserves. It has lesser funds available to lend. Its capacity to lend decreases. Hence, money supply also decreases. (CRR ↑ ⇒ money supply ↓). This rate is currently 4%.
3. Open Market operations (OMO): RBI buys and sells Government securities in the open market to maintain the money supply in the economy.  If it has to reduce the money supply, it will start selling Government securities in the open market and vice versa. This is called Open Market Operations (OMO). (Sell securities ⇒ money supply ↓).
4. Bank rate: Bank rate is the rate at which RBI lends funds to the commercial banks. If this rate increases, it becomes expensive to borrow from the RBI. Therefore, banks increase their lending rates. Hence, lending activities decline. (Bank rate ↑ ⇒ money supply ↓) This rate is currently 6.50%.
5. Repo rate: Repo rate is the rate at which RBI lends funds to the banks against securities. To illustrate, if a bank wants to borrow money from RBI, it will have to keep Government securities as collateral. It will also have to promise the RBI that it will repurchase these securities at a higher rate at some time in the future. An increase in repo rate will lead to similar effects as the increase in Bank rate. (Repo rate ↑ ⇒ money supply ↓). This rate is currently 6.25 %.
6. Reverse repo is the rate at which banks keep their excess funds with the RBI. If the reverse-repo rate increases, banks will find it profitable to keep its funds with RBI. Hence, lending activities will decline (Reverse repo rate ↑ ⇒ money supply ↓). The Reverse repo rate is always 1% less than the repo rate. It is 6.00 % at present

What does the stance of the policy mean?

MPC has kept the stance focused around three terms :

1. Calibrated tightening stance: This means the benchmark rate either will remain the same or will move upward from the current position.
2. Dovish stance: This means the benchmark rates will move down from the existing levels.
3. Neutral stance: This means that the MPC has kept its stance to be flexible. That means they can increase it, decrease it or keep it the same according to the needs of the economy.

Now that is being said and that is being done. Let's discuss the changes made by the MPC in its current meeting.

Important Decisions By MPC:

1. The repo rate is reduced by 25 basis points from 6.50 percent to 6.25 percent. Consequently, the following rates were adjusted too.

Particular	Earlier Rate	New Rate
Reverse Repo under LAF	6.25%	6%
Bank Rate	6.75%	6.50%
MSF	6.75%	6.50%
CRR (Unchanged)	4.00%	4.00%
SLR ( Unchanged)	19.50%	19.50%

2. The policy stance has been changed to neutral from calibrated tightening. The change in stance also signals higher chances of more cuts in the coming months if inflation persisted within tolerable limits.

3. A large part of the current investment recovery has been driven by government spending and it was necessary to broad base the revival with a private sector boost.

Other Announcements Made By RBI:

1. The limit of collateral free bank loans for farmers to Rs 1.6 lakh from Rs 1 lakh.
2. Greater operational freedom for Banks to offer interest rates to bulk deposits.
3. The definition of “bulk deposits” has been increased to Rs 2 crore from Rs 1 crore currently.
4. The headline inflation is likely to persist within the RBI’s tolerable level of 4 percent.

How Will It Affect You?

As mentioned above after the change of stance we can expect a further cut in the rates by the RBI. These changes shall deliver the following benefits:

1. EMI for home, auto and personal loan shall be reduced.
2. The Availablity of the affordable loan may boost up.
3. This rate cut shall lend the debt markets in a strong position.
4. The NBFC and other financial sectors will be getting a boost.