Home » Blog » The RBI’s Function: Handling Growth and Stability in the Economy

The RBI’s Function: Handling Growth and Stability in the Economy

shashikant Das

Pic Credit: Loksatta

By Sujata Muguda, Shreyas WebMedia Solutions

7 June 2024: The Reserve Bank of India (RBI), as the nation’s central bank, plays a pivotal role in the economic stability and growth of the country through its monetary policy. The RBI’s Monetary Policy Committee (MPC) has the critical task of steering the economy towards a path of sustainable growth while keeping inflation within targeted levels. In its latest policy review, the MPC decided to maintain the repo rate at 6.5%, marking the eighth consecutive time this rate has been held steady. This decision reflects the committee’s assessment that the current rate is conducive to achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth.

The RBI’s steadfast approach comes amidst a complex economic environment, where growth and inflation are often at odds. By keeping the repo rate unchanged, the RBI signals its commitment to nurturing an environment that fosters robust economic activity without stoking inflationary pressures. The MPC’s projection of a 7.2% real GDP growth for the fiscal year 2025 underscores a positive outlook for the economy, suggesting a rebound from any pandemic-induced slowdowns and a steady progression toward pre-pandemic levels of economic activity.

The repo rate, a tool used by the RBI to control liquidity and inflation, directly influences the cost of borrowing in the economy. A lower repo rate typically makes loans cheaper, encouraging spending and investment, which can boost economic growth. Conversely, a higher repo rate can help temper inflation by making borrowing more expensive, thereby slowing down spending. The RBI’s current policy stance indicates a delicate balance between supporting growth and containing inflation, especially in light of global economic uncertainties and domestic challenges.

For borrowers, especially those with home loans, the unchanged repo rate means that the interest rates on loans are likely to remain at current levels. This stability can be beneficial for long-term financial planning, although it also means that the relief of lower EMI payments is not on the immediate horizon. The real estate sector, which is sensitive to interest rate movements, may continue to experience steady demand, as the cost of borrowing remains unchanged.

The RBI’s monetary policy is not just about managing interest rates; it encompasses a broader range of instruments, including the reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR), among others. These tools collectively help the RBI in managing the money supply and credit availability in the economy. The central bank’s policies are thus instrumental in guiding the economic trajectory of the nation, influencing everything from inflation and exchange rates to employment and industrial output.

In conclusion, the RBI’s latest monetary policy reflects a cautious yet optimistic approach towards managing the Indian economy. The decision to keep the repo rate unchanged is a testament to the MPC’s confidence in the current economic framework and its ability to foster growth while keeping inflation in check. As the global economic landscape evolves, the RBI’s policies will continue to adapt, ensuring that India’s economic foundations remain strong and resilient.

Leave a Reply

Your email address will not be published. Required fields are marked *