2 min read.Updated: 02 Jun 2021, 05:45 AM ISTJagadish Shettigar,Pooja Misra
The MPC meets on 2-4 Jun against the backdrop of the second wave of the covid-19 pandemic and inflation. Its task: maintain the flexible inflation target and make sure economic revival is on track.
The Monetary Policy Committee (MPC) meets on 2-4 June against the backdrop of the second wave of the covid-19 pandemic and inflation. Its task: maintain the flexible inflation target and make sure economic revival is on track. Mint explains the basics and likely scenarios.
What’s an MPC meeting all about?
The Reserve Bank of India Act, 1934, was amended by the Finance Act, 2016, to set up the MPC in order to introduce transparency and accountability in the way monetary policy decisions are made. It has six members—three central bank officials and three government nominees—headed by the RBI governor. It has the responsibility for fixing key policy rates (interest rates) in the country. The MPC attempts to contain inflation and accordingly formulates monetary policy measures in order to influence interest rates. These policy review meetings are held at least four times a year.
What is inflation targeting?
Inflation targeting, an explicit objective of the monetary policy, is based on the principle that long-term growth can be achieved by maintaining price stability. The flexible inflation targeting framework came into effect in 2016 in India. The RBI is responsible for achieving a Consumer Price Index (CPI)-based inflation target of 4%, with a flexible band of (+/-) 2%. In April, the CPI stood at a comfortable 4.3%. However, Wholesale Price Index (WPI)-based inflation increased to 10.49%. This could bring cost pressures from rising commodity prices.
What could be the policy direction?
The MPC decides key policy rates such as repo rate, reverse repo rate, marginal standing facility, cash reserve ratio and statutory liquidity ratio. At the meeting, the MPC will assess if the trend in the WPI is being transmitted to the CPI too. In such situations, traditionally, a tight monetary policy is adopted to contain inflationary pressures.
What’s the pandemic got to do with it?
The pandemic has led the RBI to focus on reviving the economy by going out of the way to keep interest rates low. Its focus has been on building the right environment for strengthening macroeconomic stability—an anchor for economic recovery—and improving the investment climate. The priority is to move India back on the trajectory of economic growth. The Organization for Economic Co-operation and Development on Monday cut India’s growth forecast for FY22 to 9.9% from 12.6% estimated in March.
What could the MPC decide this time?
Despite fears of the WPI trend transmitting to the CPI soon, the RBI may not go for inflation targeting. It is likely to keep the policy rate intact—at this juncture, the MPC wouldn’t want to be seen to be doing anything to upset economic revival. Though the RBI is an autonomous institution and is free to take policy decisions as per professional norms, it can’t afford to be isolated during a national crisis such as the current second wave of the pandemic.
Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.