Review of RBI monetary policy

In the recent meeting of the Monetary Policy Committee, the Reserve Bank of India-RBI has decided to keep the monetary policy rates unchanged.

What is Monetary policy?

• Monetary Policy is the central bank’s policy which uses the monetary instruments like Repo rate, Reverse repo rate, Liquidity Adjustment Facility and many others, to achieve the goals stated in the Act. In India, the Reserve Bank of India (RBI) has been given the responsibility of conducting monetary policy as mandated under the Reserve Bank of India Act, 1934.

Monetary Policy Goal:

• The primary objective of monetary policy is to maintain price stability keeping economic growth in mind. Price stability is an essential for sustainable development.
• As per the Reserve Bank of India Act-1934, the Government of India will set the inflation target once in every five years in consultation with the RBI.
• The Central Government has set it at 4 percent for the period from August 5, 2016 to March 31, 2021 as per the ‘Consumer Price Index’ (CPI). The upper limit of which is 6 percent and the lower limit is 2 percent.

The composition of the Monetary Policy Committee is as follows:

• Governor of the Reserve Bank of India – Chairperson, ex officio: Shri Shaktikanta Das
• Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy– Member, ex officio: Dr. Michael Debabrata Patra
• One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio: Dr. Mridul K. Saggar
• Chetan Ghate, Professor, Indian Statistical Institute (ISI): Member
• Pami Dua, Director, Delhi School of Economics: Member
• Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad: Member.

Some important instruments of Monetary Policy:

The RBI’s Monetary Policy has several direct and indirect instruments which is used for implementing the monetary policy. Some important instruments of Monetary Policy are as follows:

Repo Rate:

• It is the (fixed) interest rate at which banks can borrow overnight liquidity from the Reserve Bank of India against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).

Reverse Repo Rate:

• It is the (fixed) interest rate at which the Reserve Bank of India can absorb liquidity from banks on an overnight basis, against the collateral of eligible government securities under the LAF.

Liquidity Adjustment Facility (LAF):

• The LAF has overnight as well as term repo auctions under it.
• The term repo helps in the development of the inter-bank term money market.
• This market sets the benchmarks for pricing of loans and deposits.
• This helps in improving the transmission of monetary policy.
• As per the evolving market conditions, the Reserve Bank of India also conducts variable interest rate reverse repo auctions.

Marginal Standing Facility (MSF):

• MSF is a provision which enables the scheduled commercial banks to borrow additional amount of overnight money from the Reserve Bank of India.
• Bank can do this by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest.
• This helps the banks to sustain the unanticipated liquidity shocks faced by them.

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