Monetary Policy refers to the role of the central government in using monetary tools like the Repo Rate, in order to control the money supply in the economy, In other terms, monetary policy is the set of decisions taken by the central bank in our case Reserve Bank Of India, in order to target inflation or money supply in the economy. The Reserve Bank of India is vested with the task of making monetary policy through the RBI Act 1934, more recently in 2016, the Government Of India set up a monetary policy committee with the sole of keeping monetary policy within a certain bracket (4%+-2) . RBI uses the Repo rate as the primary tool to check the supply of money in the economy. There are various other terms associated with the monetary policy that is often asked in the various examination, The candidates must have in-depth knowledge of RBI Monetary Policy Tools and know the concepts around the monetary policy. The space below has the essential details related to the Monetary Policy of RBI. If you are preparing for competitive exams and are looking for expert guidance, you can check our Bank Special Online Classes: Join Detailed Batch By Safalta here!
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RBI Monetary Policy Tools
Before we go into the technical details lets us first know, how are the inflation target set and some essential details about the monetary policy committee. As per the RBI Act 1934, the central government in consultation with the RBI Governor sets the broad inflation target i.e- (2-6%). The candidates preparing for the exams must know that when we refer to inflation targeting it is the Consumer Price Index (Combined) that is used for targeting the inflation.
The monetary policy committee set up in 206 comprises of 6 members- three are the officials from the RBI and the other three are nominated by the government. As of today, the members of monetary policy are- Shaktikanta Das (Governor of RBI), Dr. Michael Debabrata Patra (Deputy Governor), Dr Mridul K. Saggar, and Prof. Jayanth R. Varma, Dr. Ashima Goyal, and Dr. Shashanka Bhide. The monetary policy committee must meet 4 times in an year, as per a norm it has been meeting every 2 months. The decision in monetary policy is taken on a consensus basis while the Governor of RBI Casts a vote in case of a disagreement.
To know more read here.
To know more read here.
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Here are a few monetary policy tools that must be known to all the candidates:
- Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
- Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
- Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
- Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
- Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
- Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
- Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
- Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
- Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
- Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.
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What is the primary role of Monetary Policy Committee?
The primary role of the monetary policy committee is inflation targeting.
What is the measure of inflation in for the purpose of monetary policy?
The measure of inflation is the CPI Combined.
When was Monetary Policy Committee set up?
The monetary policy committee was set up in the year of 2106.
Who are the members of monetary policy committie?
The members of the monetary policy committee are Shaktikanta Das (Governor of RBI), Dr. Michael Debabrata Patra (Deputy Governor), Dr Mridul K. Saggar, and Prof. Jayanth R. Varma, Dr. Ashima Goyal, and Dr. Shashanka Bhide.