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Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit.
Monetary policy refers to the policy of the central bank (Reserve Bank of India RBI) with regard to the use of monetary instruments under its control to maintain price stability while keeping in mind the objective of growth.
Monetary Policy Committee & Members
The Monetary Policy Committee (MPC) constituted by the Central Government under Section 45ZB determines the policy interest rate required to achieve the inflation target.
Section 45ZB of the amended RBI Act, 1934 also provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government by notification in the Official Gazette. Accordingly, the Central Government in September 2016 constituted the MPC as under:
- Urjit Patel, Governor of the Reserve Bank of India – Chairperson, ex officio;
- R Gandhi, Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy – Member, ex officio;
- Michael Patra, One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio;
- Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;
- Professor Pami Dua, Director, Delhi School of Economics – Member; and
- Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad – Member.
(Members referred to at 4 to 6 above, will hold office for a period of four years or until further orders, whichever is earlier.)
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Instruments of Monetary Policy
There are several direct and indirect instruments that are used for implementing monetary policy given below.
Current Repo Rate, Reverse Repo, CRR, SLR Rates
The Monetary Policy Committee (MPC) met on February 7 and 8, 2017 for the Sixth Bi-monthly Monetary Policy Statement for 2016-17.
|Reverse Repo Rate||5.75%|
|Marginal Standing Facility Rate MSF||6.75%|
|Cash Reserve Ratio CRR||4%|
|Statutory Liquidity Ratio SLR||20.50%|
Current Repo Rate, Reverse Repo, CRR, SLR Rates Definitions
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 – currently 50 bps below the repo rate – at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
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 [currently two per cent of their net demand and time liabilities deposits (NDTL)] at a penal rate of interest, currently 50 basis points above the repo rate. This provides a safety valve against unanticipated liquidity shocks to the banking system.
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 RBI 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 shall maintain with the Reserve Bank as a share of such per cent of its 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 banks shall 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.
Current Repo Rate, Reverse Repo, CRR, SLR Rates Pdf Download
Current Repo Rate, Reverse Repo, CRR, SLR Rates – Monetary Policy