Real interest rate of 2% risks impairing growth: MPC’s Varma.


Syllabus: GS-III

Subject: Economy

Topic: Monetary policies and instruments

Issue: Monetary Policy

Context: Monetary Policy Committee (MPC) member Jayanth R. Varma dissented the repo rate of 6.5% in the MPC meeting.

  • Repo rate, short for repurchase rate, is the rate at which the RBI lends short-term money to commercial banks.

Monetary Policy Committee:

  • Constituted in 2016 by amending RBI Act,1934.
  • Composition: It is a six-member committee, three from RBI and three appointed by the central government.
  • The Governor of RBI – ex-officio chairperson of the committee.
  • Objective – To maintain price stability while keeping in mind the objective of growth.
  • The MPC determines the Policy Rate(repo rate) to achieve inflation target and the decided repo rate is binding on the RBI.
  • The MPC is mandated to meet at least four times in a year.
  • Voting: Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
Inflation target:

●       As per RBI Act 1934, the Central Government will determine the inflation target in terms of the Consumer Price Index(CPI), once in every five years.

●       The current inflation target is between 2% to 4%.

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