Monetary policy is a measure or policy of the central bank of our country, RBI, to use the monetary instruments under its aegis to achieve the relevant goals as specified in the RBI Act. The primary objective of monetary policy remains to maintain price stability without compromising growth in the economy as the latter depends on the former in a great way.
The RBI aims at setting the repo rate based on the prevailing & upcoming macroeconomic situation and liquidity conditions so that the same signals through the whole financial system and influences the aggregate demand in the economy on which rests the inflation & growth of in & of the economy.
Just as we mentioned the Repo rate that the RBI reviews every quarter, let us discuss it in greater detail and also some other important instruments of monetary policy –
- Repo Rate – The interest rate at which RBI lends to banks on an overnight basis
- Reverse Repo Rate – The interest rate at which RBI borrows from banks or absorbs liquidity against the issuance of government papers
- Liquidity Adjustment Facility (LAF) – LAF consists of overnight as well as term repo auctions that are issued for a specified period.
- Bank Rate is the rate at which RBI buys or rediscounts bills of exchange or other commercial papers.
- Cash Reserve Ratios – The average daily balance that banks are required to maintain with the Reserve Bank
- Statutory Liquidity Ratio – The percentage of a bank's net demand and time liabilities that it is required to maintain in safe & liquid assets.
- Open Market Operations (OMOs) – these include the purchase and sale of government securities for increasing or reducing liquidity in the economy.
As we understand these terms above, we will be able to better understand the implication of change in any of these elements as may be introduced by RBI in the quarterly monetary policy review.
The above are tweaked to bring about the relevant changes in the economy by increasing or reducing the flow of money supply therein.
RBI Monetary Policy 2020
- The RBI decided to keep the key rates of the repo and reverse repo unchanged at 4% and 3.35% respectively in the monetary policy announcements 2020 done in August & October. Repo rate has a bearing on all bank transactions including rates of interest on different loans & fixed deposits. This rate being kept unchanged was a policy decision taken by the Monetary Policy Committee (MPC) after many discussions and much brainstorming.
- The Marginal Standing Facility & Bank Rate too were kept unchanged at 4.25% in the monetary policy announcements in October. CRR & SLR too remain unchanged at 3% and 18%.
- The Monetary Policy Committee unanimously took this call and decided to analyze the course forward before jumping to another rate cut and thus decided to keep the status quo by keeping the rates unchanged. An accommodative stand was taken to cut in the future if the macroeconomic situation so demands. In the tough pandemic times, the RBI decided to take an accommodative stand to support growth and ease stress. The RBI Governor also made an announcement regarding the Gross Domestic Product (GDP) to contract by 9.5% this fiscal primarily attributed to the pandemic situation that has created turmoil in global markets too, leaving India alone.
- Inflation apart from economic growth remains the most critical factor which is considered by the Monetary Policy Committee when deciding about their stand for monetary policy. The RBI clearly stated that while supply chain disturbances can influence prices, the expectation of aggregate demand being subdued would contain the pressure on prices. The RBI has decided to keep the focus on Growth to revive the economy. The intermittent disturbance in inflation is being taken as a natural outcome of supply constraints due to the pandemic.
An Analysis of the RBI Monetary Policy 2020
The experts in the field reacted in a positive way towards the RBI Monetary policy 2020, due to various reasons, some of the reasons are listed below.
- RBI Monetary Policy 2020 has been an active one in the initial time of the year with rate cuts having been introduced to improve the liquidity situation in light of the pandemic effects but the stance in October is a more conservative one where there is an expectation of the past actions to still reap benefits and also of the growth to be a more self-driven process that would mark the revival of the economy from the sluggish pandemic pace we are facing for now.
- The Monetary Policy is a highly important and crucial tool with the Reserve Bank of India to ensure that two of the very important economic variables of Growth & Inflation remain intact at all times and there is no distortion in the smooth functioning of our economy.
- In the current times of pandemic, the RBI Monetary Policy attains even more significance as a tool to maintain if not push economic growth and also to keep inflation within an acceptable range so that people’s lives are not impacted adversely and also the normal running of the economy is not halted.
- The central bank also highlighted that the Indian economy along with the global economy (though on a lop-sided structure) is appearing to rebound in the third quarter of this financial year as against the steep fall in quarter two. In comparison to the pre covid levels, several indicators point at ease of contractions in the various sectors of our economy and that there are signs of growth that are now beginning to show. Our rural economy looks resilient and will boost the overall economic activity and growth in times to come.
People Often Ask
- How often does RBI review its monetary policy?
- What is CRR and SLR rate 2020?
- What is the reverse repo rate at present?
- Who decides the monetary policy of RBI?
- What are the objectives of monetary policy of RBI?
The monetary policy is reviewed in Reserve Board meetings of RBI that takes place 11 times in a year on every first Tuesday of each month except in January.
The current CRR rate is 3% and the SLR rate is 18% as set by RBI for the year 2020.
The current repo rate is 4% as set by the RBI.
The Reserve Bank Board decides the monetary policy, they meet 11 times a year to review and draft the monetary policy.
The objectives of monetary policy include ensuring inflation targeting and price stability, full employment, and stable economic growth.
Conclusion
The RBI in its RBI Monetary Policy 2020 release in October clearly stated that the liquidity measures will be used by it predominantly to revive the activity in some specific sectors that have both backward and forward linkages and a multiplier effect on growth too.