Context:RBI has recently released its monetary policy report (MPR).The report follows the unscheduled monetary policy meeting held in end March to discuss the uncertainties arising from the nationwide lockdown.

More about the monetary policy report (MPR) released recently:

  • Inflation rates:
    • CPI inflation is tentatively projected to lower from 4.8% in Q1 of 2020-21 to 4.4% in Q2, 2.7% in Q3 and 2.4% in Q4 of FY21.
    • Consumer price index (CPI)-based inflation, which had stayed elevated in the last few months, is expected to soften during the course of the FY21.
  • Expected even more reduction in the rate:
    • RBI also added the caveat that in the prevailing high uncertainty, aggregate demand may weaken further than currently anticipated and ease core inflation further.
  • Implications of the drop in oil prices:
    • The sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade.
    • On the other hand the gain from this channel is not expected to offset the drag from the shutdown and loss of external demand.
  • On exchange rates:
    • Renewed bouts of global financial market volatility caused by the uncertainty of macroeconomic impact of the COVID-19 is most likely to exert pressure on the Indian rupee.
  • Weighted average lending rate of banks in fresh loans:
    • Interest on housing loans fell by 34 basis points (bps), vehicle loans by 73bps, education loans by 21bps and loans for micro, small and medium enterprises (MSMEs) by 6bps.
  • Faster transmission of interest rates:
    • Of the 62 banks from whom information was collected, 36 banks adopted the policy repo rate as the external benchmark.
    • The median spread in respect of fresh rupee loans linked to the policy repo rate was the highest for other personal loans.
      • The median spread is defined as the difference between the median weighted average lending rate and the repo rate.
  • RBI refraining from making any prediction on growth:
    • Under highly fluid circumstances during the lockdown in which incoming data for growth prediction is fluctuating on a daily basis.
    • This is why forecasts for real GDP growth in India are not provided during current MPR, awaiting a clear fix on the intensity, spread and duration of COVID-19.


About Monetary Policy Committee

  • Constitution: IT was constituted by the Central Government as per the Section 45ZB of the amended RBI Act, 1934.
  • Functions:This committee decides various policy rates like Repo rate, Reverse repo rate, MSF(Marginal standing Facility)  and Liquidity Adjustment Facility etc.
  • Composition:The MPC is headed by the RBI Governor. Of the six members, three are nominated by the government, while the remaining three are from the RBI (including the Governor).
  • Decision making:The Monetary Policy Committee takes decisions based on majority vote. Each member has one vote but the RBI Governor gets a casting vote in case of a tie.


Image Source:RBI