Monetary and Credit Policy of RBI

The monetary and credit policy of the Reserve Bank of India (RBI) is widely regarded to be a central bank’s defining function. The RBI took on several developmental efforts in independent India, which was quite unusual for a central bank. However, the monetary policy remained its primary concern. The introduction chapter explored the main structural aspects of the RBI’s economic and financial environment and the accompanying diversity, like its obligations as a central bank. This inherited framework had to impact monetary policy, commonly defined as policies, objectives, and instruments aimed at managing the money supply, cost, and availability of economic credit.

Formation of Monetary and Credit Policy of RBI

The RBI Act of 1934 states that RBI’s mission is to ‘control the issue of banknotes and the holding of reserves to ensure monetary stability in India’. The early 1980s saw a significant amount of fiscal and monetary restrictions. The second half of the year saw the implementation of far-reaching policy initiatives, the most notable of which was the gradual activation of monetary policy. For the RBI, price stability was the chief objective of its monetary and credit policy. For this reason, monetary policy during this time was essentially like a ‘credit policy’.

The RBI has the difficult challenge of balancing the inflationary impact of the Government’s expanding deficit in its budgetary operations. The RBI Act, 1934, begins with a preamble that sets out its objectives as ‘to regulate the issue of Banknotes and the keeping of reserves to secure monetary stability in India and generally to operate the currency and credit system of the country to its advantage’.

In practice, inflation control was perceived as the joint responsibility of the Government and the RBI. Through its credit policy measures, the latter attempted to moderate the growth of liquidity to the desired levels and provided funds for the Central Government’s budgetary operations and its market borrowing programmes. For this reason, monetary policy during this period was essentially like a credit policy.

Monetary Policy Stance

As per the RBI, monetary policy stance for 2001–02 was expressed in its Annual Monetary and Credit Policy statement on April 19, 2001, and has provided a sufficient flow of credit for promoting an increase in the real Gross Domestic Product (GDP) growth spurred by a resurgence in investment demands, as well as in keeping the interest rate steady. With a penchant towards softer interests in the environment rates as needed by the growing economic and financial conditions and financial circumstances assuming a resurgence of the healthy industrial sector, a decent monsoon, and a good economy, the pace of real GDP growth, and the performance of exports the GDP is expected to grow at a rate of 6.0 to 6.5 per cent this year.

Objectives of Monetary Policies:

• Generating employment
• Exchange rate stabilisation
• Price stability
• Accelerating the growth of the economy
• Balancing savings and investment

Tools the Central Bank uses to achieve the Monetary and Credit Policy of RBI:

• Intervention in the forex market
• Bank rate
• Open market operation
• Moral suasion
• Bank rate

Repo and Reverse REPO Rates:

• A REPO is a sale and repurchase of the same securities between two parties
• Under this agreement, the seller sells specific securities in exchange for a mutually agreed-upon repurchase at a later date and price
• Similarly, the buyer purchases the same securities to resell them to the seller at a predetermined price later
• The RBI loans short-term security to banks in government bonds (REPO) and charges a REPO rate for the money it lends to the Government, and banks take on the burden of repurchasing the security later
• A reverse REPO rate occurs when the RBI borrows from the market to absorb excess liquidity by selling securities and then repurchasing them after a short period
• The reverse REPO rate is the rate at which the RBI borrows
• The REPO or reverse REPO transaction occurs exclusively in Mumbai, and the securities are treasury bills dealt in the central and state government securities that the RBI sanctions
• The REPO and reverse REPO are instruments used by the Central Bank to regulate liquidity in the market

Conclusion

The Government of India will reduce interest on small savings accounts. If tiny savings rates are linked to the bank rate, this could be a long-term answer. The RBI urges banks to shift the base rate calculation methodology from average cost of funds to marginal cost of funds to boost monetary transmission. On March 27, the RBI cut the REPO and reverse REPO rates to 4.40 per cent and 4.00 per cent, respectively. However, with the economy being harmed by the coronavirus outbreak, the Central Bank decreased the reverse REPO rate by another 25 basis points on April 17.