Money & Banking

RBI initiates process to review Monetary Policy Framework

Our Bureau New Delhi | Updated on February 15, 2020

Shaktikanta Das , RBI Governor at Post Budget Board meeting ,in New Delhi, on15.2.20.   -  Kamal Narang

The Reserve Bank of India (RBI) has initiated a review of the monetary policy framework. It has also expressed optimism that credit growth will pick up pace.

Addressing a press conference along with Finance Minister Nirmala Sitharaman here on Saturday, RBI Governor Shaktikanta Das said that RBI is internally reviewing the performance of the MPC over the last three-and-a-half years.

“If required, I must qualify by saying that at the appropriate time, if required, we will have a dialogue and discussion with the government, but at the moment it is under review within RBI,” he said.

The Government of India and Reserve Bank of India signed a Monetary Policy Framework Agreement on February 20, 2015. The objective of the monetary policy framework is to primarily maintain price stability, while keeping in mind the objective of growth. As per the agreement, RBI would set the policy interest rates and would aim to bring inflation below 6 per cent by January 2016 and below 4 per cent with a band of (+/-) 2 per cent for 2016-17 and all subsequent years. The agreement also talked about setting up a Monetary Policy Committee which is in place since September 2016.

Outside the RBI, two things are being discussed. First, is the use of core or headline inflation. Core inflation means headline rate of inflation minus rate of inflation for volatile items such as food and fuel. Since the MPC relies on headline inflation and it has seen an unexpected change due to sudden rise in one or two food or fuel items, there is a suggestion to use a different matrix. The second issue is revision in the targeted inflation rate (4 per cent in either direction). Validity of the existing target will come to an end on March 31, 2021. Experts feel that there should be an upward revision in the rate.

Credit growth

Meanwhile, the Governor expressed hope that credit to the commercial sector will rise further in the coming months. He said the momentum is gathering pace. RBI is keeping an eye on the flow (credit distribution) and not on the stock (outstanding as on a particular date). From April to September 2019, the flow was about ₹1-lakh crore. However, from October till now it has gathered pace. The flow of credit from all sources — banks in the domestic market and external commercial borrowing — has improved to about ₹7.5-lakh crore.

“If you look at bank credit to the commercial sector, it was actually negative growth at the end of September by about ₹1.3-lakh crore (minus) or so. Now, it is ₹2.7-lakh crore (positive). This is the latest number we have at the end of January,” he said, adding that the momentum in credit flow is gathering pace.

He appreciated various measures taken by the government before the Budget as well as those announced in the Budget. The overall expectation is that credit flow will improve in the coming months, he said.

Published on February 15, 2020

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