Monetary Policy

Source: Hindustan Times

Introduction

In recent times, India has seen a drop in core inflation (which excludes food and energy prices) but persistent challenges with food inflation. Food inflation, a persistent concern plaguing India's economic landscape, continues to defy conventional remedies and elevating inflationary pressures. At 7.6%, food inflation remains elevated as of January 2024, presenting a formidable obstacle to achieving targeted inflation rates. The Reserve Bank India (RBI) continues to monitor these trends closely and adjust monetary policy as needed to maintain stability and support sustainable economic growth.

What are the Solutions for Food Inflation?

• Efforts to mitigate food inflation require a multi-pronged strategy encompassing supply-side interventions, investment in agricultural infrastructure, and measures to enhance supply chain efficiency.
• Strengthening resilience against weather-related disruptions and bolstering agricultural productivity emerge as imperative priorities in addressing the structural drivers of food inflation.

What is Monetary Policy?

• About and Role of RBI:
  • Monetary policy leads to economic governance of country and encompasses a set of measures wielded by central banks to regulate money supply, interest rates, and credit availability.
  • In India, the RBI is vested with the authority to formulate and execute monetary policy, governed by the provisions delineated in the RBI Act, 1934.
• RBI's Amendment for Flexible Inflation Targeting:
  • In May 2016, an amendment to the RBI Act, 1934 established the framework for flexible inflation targeting, aiming to anchor monetary policy around inflation control.
• Inflation Target Determination:
  • Section 45ZA of RBI Act, 1934 empowers the Central Government, in collaboration with the RBI, to set the inflation target using the Consumer Price Index (CPI) every five years.
  • The target, notified on 5^th August 2016, set CPI inflation at 4% with a 2-6% tolerance band till 31^st March 2021.
    • This was reaffirmed till 31^st March 2026.
• Monetary Policy Committee (MPC):
  • Section 45ZB mandates a six-member MPC to set the policy rate necessary for meeting the inflation target.
• Consequences of Missing Targets:
  • The RBI must report to the Central Government if inflation strays from the target, outlining reasons, proposed actions, and estimated recovery time.
• Operating Framework:
  • The operational objective is to align the weighted average call rate (WACR) with the policy repo rate through liquidity management, facilitating transmission of rate changes to influence aggregate demand, crucial for inflation and growth.

What is the Monetary Policy Committee?

• Composition:
  • The Monetary Policy Committee (MPC) is constituted under Section 45ZB of the amended RBI Act, 1934.
  • It comprises six members, empowered by the Central Government through an official notification in the Gazette.
  • The first MPC came into existence on 29^th September 2016. The current composition, as of 5^th October 2020, includes the
    • Governor of the RBI (ex officio Chairperson),
    • Deputy Governor of the RBI in charge of Monetary Policy (ex officio member),
    • One officer nominated by the Central Board of RBI (ex officio member),
    • And three external members.
• Function:
  • The primary function of the MPC is to determine the policy repo rate necessary to achieve the inflation target set by the government.
• Meeting:
  • The MPC is mandated to convene at least four times annually to deliberate on monetary policy decisions. The meetings are important for assessing economic indicators and devising appropriate strategies to maintain price stability and economic growth.
• Voting Power:
  • Each member of the MPC holds equal voting power, with one vote per member.
  • In the event of a tie, the Governor exercises a second or casting vote to resolve the deadlock.
• Statement Writing:
  • Every MPC member is required to draft a statement detailing the rationale behind their vote, whether in favor of or against the proposed resolution.
  • This transparency ensures that the decision-making process is well-documented and based on informed analysis.

Conclusion

As India confronts the persistent challenge of food inflation, a concerted and collaborative effort is essential to chart a path toward sustainable solutions. By fostering synergy between policymakers, agricultural stakeholders, and market participants, India can navigate the complexities of food inflation and forge a resilient path toward economic stability and prosperity. In embracing innovation, resilience, and strategic foresight, India can surmount the challenges posed by food inflation and usher in an era of sustainable growth and development.