Monetary policy measures announced by RBI

Q.6 Describe the monetary policy measures announced by the RBI recently.

1. Meaning of Monetary Policy

Monetary policy is the policy through which the Reserve Bank of India (RBI) controls money supply, interest rates and credit in the economy in order to achieve objectives like price stability, growth, exchange rate stability, etc.

The main instrument is the Monetary Policy Committee (MPC) which meets every two months and announces the policy. monetary policy measures announced by RBI

2. Main Instruments of RBI’s Monetary Policy

1. Repo Rate
   
   • The rate at which RBI lends short-term money to commercial banks against government securities.
   • Increase in repo rate = costlier loans, credit becomes tight, inflation comes down.
   • Decrease in repo rate = cheaper loans, encourages borrowing and investment, supports growth. monetary policy measures announced by RBI
2. Reverse Repo Rate / Standing Deposit Facility (SDF)
   
   • The rate at which RBI borrows money from banks.
   • It puts a floor to short-term interest rates. monetary policy measures announced by RBI
   • Used to absorb excess liquidity from the banking system.
3. Cash Reserve Ratio (CRR)
   
   • Percentage of a bank’s deposits which it has to keep with RBI in cash form.
   • Higher CRR = less lendable funds with banks, credit contracts. monetary policy measures announced by RBI
   • Lower CRR = more funds for lending, credit expands.
4. Statutory Liquidity Ratio (SLR)
   
   • Percentage of deposits that banks must keep in the form of cash, gold or approved government securities.
   • By changing SLR, RBI can influence the availability of credit to the private sector. monetary policy measures announced by RBI
5. Open Market Operations (OMO)
   
   • Buying and selling of government securities in the open market by RBI.
   • Purchase of securities = injects liquidity (more money in system). monetary policy measures announced by RBI
   • Sale of securities = absorbs liquidity (less money in system).
6. Marginal Standing Facility (MSF)
   
   • Window under which banks can borrow overnight from RBI in emergency, usually at a rate higher than repo.
   • Helps to control extreme volatility in inter-bank interest rates.
7. Bank Rate and LAF (Liquidity Adjustment Facility)
   
   • Bank Rate is the long-term lending rate of RBI; changes in it influence other interest rates.
   • LAF includes repo, reverse repo/SDF and MSF – it is the framework through which RBI manages short-term liquidity.

3. Recent Policy Stance of RBI (General Description)

In the recent period, RBI’s monetary policy has mainly focussed on two things:

1. Controlling Inflation
   
   • Whenever inflation crossed the tolerance band of 4% ± 2%, RBI adopted a “withdrawal of accommodation / tightening” stance. monetary policy measures announced by RBI
   • It did this mainly by raising the repo rate in steps and conducting OMOs to absorb extra liquidity.
2. Supporting Growth and Financial Stability
   
   • During periods of slowdown or shocks (for example, pandemic period or global crises), RBI reduced repo rate, injected liquidity through LTROs/TLTROs, relaxed some regulatory norms and gave moratorium/ restructuring facilities to keep credit flowing to productive sectors.

4. Important Recent Measures by IRB

1. Maintaining / adjusting Repo Rate to tackle inflation
   
   • RBI has kept the policy repo rate at a relatively higher level to anchor inflation expectations and ensure price stability.
2. Using SDF and MSF Corridor
   
   • The Standing Deposit Facility (below repo) and Marginal Standing Facility (above repo) are being actively used to keep short-term market rates within a narrow corridor and to manage day-to-day liquidity. monetary policy measures announced by RBI
3. Targeted Liquidity Measures
   
   • RBI has used targeted long-term repos and special refinance facilities for sectors like MSMEs, NBFCs, housing, etc., to ensure that productive sectors get adequate credit even when overall policy is tight.
4. Open Market Operations and Government Securities Purchase / Sale
   
   • RBI has conducted OMOs to either inject or absorb liquidity, depending on surplus or shortage of funds in the system.
5. Macro-prudential and Regulatory Measures
   
   • Tightening norms for unsecured consumer loans and NBFC exposures to prevent excessive credit growth and future NPAs.
   • Encouraging banks to make adequate provisions and maintain capital buffers. monetary policy measures announced by RBI

5. Conclusion

The recent monetary policy of RBI is mainly oriented towards:

• Keeping inflation within the target range,
• Maintaining financial stability and orderly conditions in money and forex markets, and
• Supporting sustainable economic growth by ensuring adequate, but not excessive, liquidity. Monetary policy measures announced by RBI

Through changes in repo rate, CRR, SLR, OMOs, SDF/MSF and targeted liquidity schemes, RBI has tried to strike a balance between price stability and growth, which is the core objective of India’s monetary policy framework. Monetary policy measures announced by RBI

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