Prelims level : Financial inclusion Mains level : Paper - III Economic Development
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Why is it in News?

  • The monetary policy committee of the Reserve bank of India for the second consecutive time cut the benchmark lending rate to 6%, and lowered GDP forecast to 7.2%.

What is Benchmark lending rate?

  • Also called base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security. Base rate is the minimum interest rate of a bank, below which it cannot lend, except for DRI allowances, loans to bank’s own employees and loans to bank’s depositors against their own deposits.

GDP forecast:

  • Forecast is based on an assessment of the economic climate in individual countries and the world economy, using a combination of model-based analyses and expert judgement. This indicator is measured in growth rates compared to previous year.
  • The central bank lowered the GDP forecast to 7.2%. It also said output gap remained negative and the domestic economy was facing headwinds, especially in the global front.

What is GDP:

  • Gross domestic product is the total value of everything produced in the country. It doesn’t matter if it’s produced by are citizens or foreigners. If they are located within the country’s boundaries, their production is included in GDP.
  • To avoid double-counting, GDP includes the final value of the product, but not the parts that go into it.

What is output gap:

  • Output gap refers to the difference between the actual output of the economy and its maximum potential.

Monetary policy committee:

  • MPC is a six-member committee constituted by the Central Government. The MPC is required to meet at least four times in a year.
  • 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.
  • Once in every six months, the Reserve Bank is required to publish a document called the Monetary Policy Report to explain:
  • the sources of inflation and
  • the forecast of inflation for 6-18 months
  • The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.

Main goal of monetary policy Committee:

  • The primary objective of monetary policy is to maintain price stability. To maintain price stability, inflation needs to be controlled. The government of India sets an inflation target for every five years. RBI has an important role in the consultation process regarding inflation targeting. The current inflation targeting framework in India is flexible in nature.
  • When the total money supply is increased rapidly than normal, it is called an expansionary policy while a slower increase or even decrease of the same refers to a contractionary policy.
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