MPC Retains Repo Rate, Lowers Growth Forecast
Subject: Economy
Why in News?
The Monetary Policy Committee (MPC) of the Reserve Bank of India has unanimously decided to keep the repo rate unchanged at 5.25% while revising the country’s growth outlook downward due to global uncertainties, geopolitical tensions, elevated energy prices, and concerns over weather-related inflation risks.
Key Decisions of the MPC
| Policy Rate | Current Rate |
|---|---|
| Repo Rate | 5.25% |
| Standing Deposit Facility (SDF) Rate | 5.00% |
| Marginal Standing Facility (MSF) Rate | 5.50% |
| Bank Rate | 5.50% |
Policy Stance
The MPC retained the Neutral Stance, allowing flexibility to respond to changing economic conditions.
Growth and Inflation Outlook
GDP Growth Forecast (2026–27)
| Quarter | Growth Projection |
|---|---|
| Q1 | 6.6% |
| Q2 | 6.3% |
| Q3 | 6.5% |
| Q4 | 6.8% |
| Full Year | 6.6% |
Revised downward from 6.9%.
Inflation Forecast (CPI)
| Indicator | Projection |
|---|---|
| CPI Inflation (2026–27) | 5.1% |
Revised upward by 50 basis points.
Reasons Behind RBI’s Concerns
Global Factors
- Continuing geopolitical conflicts.
- Fragile international ceasefires.
- Supply-chain disruptions.
- Elevated crude oil and energy prices.
- Global trade uncertainties.
Domestic Factors
- Possibility of a sub-normal Southwest Monsoon.
- Potential emergence of El Niño conditions.
- Rising input and production costs.
- Risk of food inflation.
Inflation Assessment
Headline Inflation
Headline Inflation refers to the overall inflation rate measured through indices such as the Consumer Price Index (CPI), including all goods and services, even volatile items like food and fuel.
- Inflation remains below the RBI target despite external shocks.
- Expected to move towards the upper tolerance band during Q3 of 2026-27.
Core Inflation
Core inflation excludes volatile components such as food and fuel.
- Underlying inflationary pressures remain moderate.
- However, future risks persist.
Second-Round Effects
Second-round effects occur when:
- Initial increase in prices (fuel, food, energy) →
- Higher wage demands →
- Increased production costs →
- Further increase in prices.
This makes inflation more persistent and difficult to control.
Resilience of the Indian Economy
Despite global uncertainties:
- Domestic demand remains strong.
- Manufacturing sector continues expansion.
- Services sector maintains momentum.
- Import diversification is helping reduce supply shortages.
However, diversification may increase import costs.
Monetary Policy Committee (MPC)
Constitutional/Legal Basis
The MPC was established under the:
- Reserve Bank of India Act, 1934
- Introduced through the Finance Act, 2016
It institutionalized India’s Flexible Inflation Targeting (FIT) framework.
Composition of MPC
The MPC consists of 6 members:
RBI Members (3)
- RBI Governor (Chairperson)
- Deputy Governor in charge of Monetary Policy
- One RBI officer nominated by the Central Board
Government-Nominated External Members (3)
Appointed by the Central Government for a term of four years.
Decision-Making Process
- Each member has one vote.
- Decisions are taken by majority vote.
- In case of a tie, the RBI Governor has a casting vote.
Objectives of MPC
Primary Objective
Maintain price stability while supporting growth.
Inflation Target
India follows a flexible inflation-targeting framework:
Target CPI Inflation = 4% ± 2%
Therefore:
- Lower tolerance limit = 2%
- Upper tolerance limit = 6%
Frequency of Meetings
- MPC meets at least four times a year.
- In practice, it generally meets six times annually (bi-monthly).
Instruments Used by MPC
Repo Rate
Rate at which RBI lends money to commercial banks against government securities.
Reverse Repo / SDF
Rate at which banks park excess funds with RBI.
CRR (Cash Reserve Ratio)
Percentage of deposits banks must maintain with RBI.
Open Market Operations (OMOs)
Purchase or sale of government securities by RBI to regulate liquidity.
MPC Policy Stances
| Stance | Meaning |
|---|---|
| Accommodative | RBI supports growth through lower rates and ample liquidity. |
| Neutral | RBI remains flexible and can move rates either way depending on data. |
| Withdrawal of Accommodation | Gradual removal of excess liquidity and pandemic-era support. |
| Calibrated Tightening | Inflation control prioritized; rate cuts generally ruled out. |
| Tightening (Hawkish) | Higher rates and tighter liquidity to contain inflation. |
| Easing (Dovish) | Lower rates and increased liquidity to stimulate growth and employment. |
UPSC Mains Question
“The Monetary Policy Committee is the cornerstone of India’s inflation-targeting framework. Discuss its composition, functions, and significance in maintaining macroeconomic stability amid evolving domestic and global economic challenges.” (15 Marks)
