Relevance: GS-3 (Indian Economy – Monetary Policy) | Source: Indian Express, RBI Bulletin
Recent macroeconomic indicators—cooling inflation, stable growth signals, and softening core prices—suggest that the Monetary Policy Committee (MPC) may consider a repo rate cut in its upcoming meeting. The RBI Governor noted that the economy now shows “space for monetary easing.”
What is a Rate Cut?
- The repo rate is the rate at which RBI lends to commercial banks.
- Rate Cut implies cheaper borrowing for the banks, leading to higher lending in the economy.
- Why is it needed now?
- CPI inflation has moderated (around 5%, the lowest in 17 months).
- Private investment and consumption remain sluggish.
- Lower rates can support credit growth and MSMEs.
Monetary Policy Committee (MPC)
- A 6-member statutory body (3 RBI + 3 Government nominees).
- Mandate: keep inflation at 4% ± 2%, while supporting growth.
- Decides repo rate by majority vote (Governor holds tie-breaker).
Impacts of a Rate Cut
|
Positive Impacts |
Negative Impacts |
| Boosts borrowing for industries & MSMEs → stimulates investment. | Can worsen inflation if done prematurely. |
| Lowers EMIs → improves household consumption. | May weaken the currency, raising import bills. |
| Supports economic recovery during slowdown. | Reduces returns on savings (e.g., FD rates fall). |
Q. Consider the following statements about the Monetary Policy Committee (MPC):
- The MPC is constituted under the RBI Act, 1934.
- All members of the MPC are appointed by the Government of India.
The primary objective of the MPC is price stability.
Which of the above statements is/are correct?
A. 1 and 3 only
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