Monetary Policy

Reviewed by Anjaneyulu | Updated on Oct 05, 2020

Introduction

Monetary policy refers to the use of monetary instruments to regulate magnitudes such as interest rates, money supply, and availability of credit, under the control of the central bank, to achieve the ultimate objective of economic policy. The central bank in the country is vested with the responsibility of conducting monetary policies. In India, the central bank is the Reserve Bank of India (RBI).

Why is Monetary Policy Important?

The RBI Act, 1934 provides for an empowered six members Monetary Policy Committee (MPC) constituted by the Central Government, that determines the policy interest rate required to achieve the inflation target.

The MPC has to conduct meetings at least four times a year and it publishes its decision after each such meeting. The next MPC meeting is due in December 2019.

As per the minutes of the MPC’s meeting conducted in October 2019, the key indicators are as follows Cash Reserve Ratio (CRR) is 4% Statutory Liquidity Ratio (SLR) is 18.50% Repo rate is 5.15% Reverse repo rate is 4.90% The Marginal standing facility (MSF) rate is 5.40% Bank rate is 5.40%

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The Reserve Bank Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. Key stakeholders view in the economy and Reserve Bank analytical work will contribute to the process for deciding on the policy repo rate.

The Financial Market Committee (FMC) meets regularly to review the liquidity conditions. It ensures that the operating target of monetary policy (weighted average lending rate) is kept close to the policy repo rate.

The key indicator rate changes transmitted through the financial system, which in turn influences aggregate demand, a key determinant of inflation and growth.

Industry Impact

Once the repo rate is announced, the operating framework designed by the RBI envisages liquidity management on a day-to-day basis through appropriate actions around the repo rate. The liquidity management framework was last revised significantly in April 2016.

Conclusion

The responsibility of conducting monetary policy is explicitly mandated under the RBI Act, 1934.

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