From time to time we hear about the announcement of Reserve Bank of India’s Monetary Policy. Ever wondered what this is all about? Again,
Monetary = Related to Money Flow and
Policy = Guidelines To Be Implemented.
Means guidelines which would determine flow of money from the RBI to public and from the public to RBI via banking channels.
If there is a guideline, then there has to be a purpose as well. The purpose of Monetary Policy is one: Price Stability. RBI’s role is to keep prices balanced. It has to ensure that the prices of daily use commodities and consumer items by the middle and the lower classes should not fluctuate much.
Prices of commodities depends upon many factors. Such as demand-supply position, purchasing power of the consumer, reality or rumours about future scarcity or abundance of a particular commodity. Prices also fluctuate owing to external factors such as rate of currencies of some major countries such as USA or China. Political instability of the local country or a global power also determine prices.
So what RBI does when it finds price instability in the commodities of daily use? It either reduces the money supply (so that people don’t have enough money to buy that commodity and the price cools down) or increases the money supply (so that people have enough money to buy that commodity and its price goes up). Let’s learn about the tools using which money supply is controlled:
Repo Rate: Rate at which RBI lends to banks against collateral security. Currently 6.50%. Most important.
Reverse Repo Rate: Rate at which banks lend to RBI against collateral. Currently 6.25%.
Liquidity Adjustment Facility (LAF): Overnight as well as term repo auctions.
Marginal Standing Facility (MSF): Borrowing by banks against their SLR. Currently 6.75%.
Bank Rate: Rate for discounting bills presented by banks. Currently 6.75%.
Cash Reserve Ratio (CRR): currently 4%.
Statutory Liquidity Ratio (SLR): currently 19.5%.
Open Market Operations (OMR): straightaway buying or selling government securities.
Monetary Policy Committee (MPC) is required to meet at least four times a year.