What the Latest RBI's Monetary Policy Changes Mean for Industries and Consumers



The first bimonthly policy for FY24 was announced by the RBI monetary policy committee (MPC) on April 6, capping a three-day meeting.

The policy regulates how credit is distributed among customers and how much interest is charged on borrowing and lending. But through the eyes of observers, it was predicted that the RBI will raise its benchmark interest rate by 25 basis points (bps), to 6.75 percent, to combat persistently rising inflation, which has frequently exceeded the RBI's standard level of six percent.

Fostering an economic expansion in a developing nation such as India is where monetary policy takes a crucial stance. However, leaving the economic growth, price stability, and exchange rate stability are also the major goals of monetary policy among other areas.

Fuelling Growth beyond Country’s Economy

Promotion of saving and investment: The monetary policy can wave its wand around how much people save and invest since it regulates the country's interest rate and inflation. For instance, a high rate of interest can most likely increase the bar on saving and investing, which helps to keep the economy's cash flow healthy.

Controlling the imports and exports: The Monetary policy assists export-oriented businesses in decreasing their reliance on imports and increasing their export. It helps them in obtaining a loan at a lower interest rate. In turn, this enhances the state of the payments balance.

Managing business cycles: A business cycle has two primary phases: a boom and a slump. By regulating credit to limit the availability of money, monetary policy can be the most effective weapon in preventing economic cycle booms and busts. By limiting the supply of money, inflation in the market can be managed. On the other hand, if the money supply expands, the economy's demand will likewise grow.

Regulation of aggregate demand: Since monetary policy can be used by the monetary authorities to influence demand in an economy, they can in turn use it to balance supply and demand for goods and services. This can lead to more people obtaining loans to pay for products and services when credit is expanded and the interest rate is lowered. This causes the demand to increase. On the other side, if the government wants to lower demand, it can tighten lending restrictions and hike interest rates.

Generation of employment: Since the monetary policy can bring down the interest rates, this immediately gives a chance for the small and medium-sized enterprises (SMEs) to acquire  a loan for business expansion. As a result, a lot of employment opportunities can be opened up from this.

Helping with the development of infrastructure: Concessional finance is permitted under the monetary policy for infrastructure development within the nation.

Managing and developing the banking sector: the RBI seeks to make banking services widely accessible throughout the country; it also gives other banks instructions to open rural offices wherever it is important for agricultural development. The government has also established cooperative banks and regional rural banks to assist farmers in quickly obtaining the financial assistance they need.

Commenting on the RBI Monetary Policy Changes, Venkatesh Gopalkrishnan, Director Group Promoter’s Office & CEO, Shapoorji Pallonji Real Estate said, "We welcome the Reserve Bank of India's prudent decision to maintain the repo rate unchanged for the second consecutive quarter. This demonstrates the central bank's steadfast commitment to fostering stability in the economy and creating an environment conducive to sustainable growth. We appreciate the significance of a stable monetary policy in sustaining long-term growth and promoting investor confidence. The unchanged repo rate provides a sense of certainty to developers and home buyers alike, instilling faith in the real estate market. It is a positive development that will have far-reaching implications for the industry. While residential demand has showcased resilience, particularly in the luxury and premium segments, this decision by the RBI is poised to further propel the real estate sector. The unchanged repo rate not only encourages investment but also facilitates affordable home loans, making homeownership more accessible to aspiring buyers. We anticipate this to contribute positively to the overall market sentiment.”


Chances of Not Reaching the Inflation Target

The RBI Act, 1934 was amended in 2016, and this led to the implementation of the Flexible Inflation Targeting Framework (FITF) in India. Every five years, after consulting with the RBI, the Indian government sets the inflation target in accordance with the RBI Act. However, this structure holds the risk of the inflation target not being able to be met for a specific period of time and this circumstance is calculated to happen when:

The average inflation rate goes above the central government’s upper tolerance level for the inflation target for three consecutive quarters.

In turn, if the average inflation rate falls below the lower tolerance level of the target inflation already set by the central government for three consecutive quarters.

Actions to Accelerate the Transmission of the Monetary Policy

First, the interest rates on small savings accounts will decrease, which could be a long-term fix if the tiny saving rates are tied to the bank rate.

Second, the RBI wants banks to switch the base rate calculation method from average cost of funds to marginal cost of funds to enhance monetary transmission.

Third, the pattern of headline inflation in the future is likely to be influenced by changes in food prices. However, the Reserve Bank’s survey anticipates a hardening of input costs and output prices and addedwith the assumption of a normal monsoon, the CPI inflation is predicted to be 5.1 percent for 2023–2024.

The MPC noted that CPI headline inflation moderated in March and April and entered the tolerance range, as anticipated. This could still be over the target, and calls for ongoing vigilance.

In light of this, the MPC chose to maintain the policy repo rate at 6.50 percent. Therefore, the MPC decided to keep its eyes peeled on how the outlook for inflation and growth is changing. It will then bring in more monetary actions to keep inflation expectations well-anchored and lower inflation to the target. The MPC also made the decision to continue concentrating on the removal of accommodation to ensure that inflation gradually converges with the objective while fostering growth.