Monetary Policy of RBI

The Reserve Bank of India’s monetary policy aims to manage the quantity of money in order to meet the needs of various sectors of the economy while also increasing the rate of economic growth in India.

To control inflation, various monetary policy tools are used by the Reserve Bank of India; examples being Cash Reserve Ratio, Statutory Liquidity Ratio, Bank Rate, Repo Rate, etc.

Monetary Policy

Monetary policy refers to the policy to control the supply of credit/money in the economy. Its objective is to correct the economy’s inflation and deflation situations. It states the use of financial instruments under the control of the Reserve Bank of India to achieve the ultimate objective of economic policy mentioned in the Reserve Bank of India Act, 1934 which is to standardise magnitudes such as availability of credit, interest rates, and money supply.

Objective of the Monetary Policy

The primary goal of monetary policy is to maintain price stability while pursuing growth. Price stability is an essential prerequisite to sustainable growth. 

The Monetary Policy Process

Section 45ZB of the amended RBI Act, 1934 also provides for the establishment of an empowered six-member monetary policy committee (MPC) by notification in the Official Gazette by the Central Government.

Process:

1. The Monetary Policy Committee (MPC) is constituted by the Central Government to frame monetary policy.
2. Objective: To determine the policy interest rate required to achieve the inflation target.
3. Members: MPC consists of 6 members.
4. Monetary Policy Department (MPD): Assists the MPC.
5. Rate cut or hike: Views of key stakeholders in the economy, and the analytical work of the Reserve Bank contribute to the process of arriving at the decision on the policy repo rate.
6. The Financial Market Committee (FMC): Meets daily to review the liquidity conditions so as to ensure that the operating target of monetary policy (weighted average lending rate) is kept close to the policy repo rate.

Monetary policy Instruments

These are also called ‘instruments of credit control’. These instruments are used to decrease the supply of money when there is an inflationary spiral in the economy and to increase the supply of money when there is a deflationary spiral in the economy.

1. Bank Rate: The interest rate that the central bank charges commercial and domestic banks for lending them money is referred to as a bank rate. This rate has been matched with the MSF rate, and as a result, it changes automatically when both the MSF and policy repo rates change.
2. Liquidity Adjustment Facility (LAF): The liquidity adjustment facility (LAF) of the Reserve Bank of India assists banks in adjusting their daily liquidity mismatches. Repo (repurchase agreement) and reverse repo are the two components of a LAF. 
3. Repo Rate: The key monetary policy rate of interest is the repo rate, or repurchase rate, at which the central bank, or Reserve Bank of India (RBI), lends short-term money to banks, primarily to control credit availability, inflation, and economic growth.
4. Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity from banks on an overnight basis in exchange for eligible government securities under the LAF.
5. Open Market Operations (OMOs): These include the outright purchase and sale of government securities for the injection and absorption of long-term liquidity, respectively.
6. Cash Reserve Ratio (CRR): The Cash Reserve Ratio (CRR) is a proportion of cash that all banks must keep on deposit with the Reserve Bank of India (RBI). The RBI determines this proportion, which is changed by the central bank on a regular basis.
7. Statutory Liquidity Ratio (SLR): The percentage of NDTL that a bank must keep in safe and liquid assets such as unencumbered government securities, cash, and gold.
8. Corridor: The corridor for daily change in the weighted average call money rate is determined by the MSF rate and reverse repo rate.
9. The Market Stabilisation Scheme (MSS): This is a scheme to regulate the excess availability of money in the economy in which the Reserve Bank of India (RBI) withdraws surplus liquidity by selling government assets to banks and other institutions.

Current rates of Monetary policy of RBI

The Reserve Bank of India held its 6th and final Monetary Policy Committee (MPC) meeting for the fiscal year 2021-22 on February 8-10, 2022. The MPC’s next meeting is slated for April 6-8, 2022.

Bank rates and the Marginal Standing Facility (MSF) rate remain unchanged:

• 4.00 percent policy repo rate
• 3.35 percent reverse repo rate
• 4.25 percent marginal standing facility rate
• 4.25 percent bank rate
• 4 percent CRR
• 18.00 percent SLR

Conclusion

Monetary policy is just a measure adopted by the Reserve bank of India for the control of money supply and credit creation by the commercial banks to keep a check on the inflationary and deflationary situation in the economy. To make the monetary policy framework, a committee of 6 members called the monetary policy committee (MPC)is made to determine the interest rates on deposit accounts and loans in the country by the rates fixed by them with the help of various direct and indirect instruments.