Every now and then you hear or read about the Reserve Bank of India’s (RBI) monetary policy on the television and financial newspapers. As the RBI governor reviews the policy document before making the announcement, have you ever wondered what exactly is RBI monetary policy and its importance towards the development of the country’s economy?
In the world of policies, an investor may get confused with the jargon terms such as the bank rate, open market operations, reserve ratio, credit limit, credit ceiling, liquid adjustment facility and lots more. Understanding these prominent terms related to the monetary policy may be quite challenging for the individuals. Hence, it becomes quite important to have a closer look at the RBI monetary policy and its significance.
What is RBI’s Monetary Policy?
The monetary policy is essentially a policy statement that is prepared by the RBI and presented four times a year by the RBI Governor. It presents a clear picture about the monetary matters of the country’s economy. It involves the best methods taken by India’s Central Bank i.e. RBI to regulate the supply of money, liquidity, price stability, interest rates, controlling inflation and cost of credit in the economy. In the developing economy like India, the monetary policy plays quite an effective role in promoting economic growth.
Objectives of RBI Monetary Policy
- Stable Economic Growth: This is one of the most prominent objectives of the RBI monetary policy in India. It basically refers to the capacity of the country in terms of manufacturing goods and services. In case the monetary policy is tight, then it may go on to reduce the liquidity and increase interest rates. This will have an adverse impact on goods production and consumption, which will eventually affect economic growth.
- Controlling Inflation and Price Stability: Another main objective of the monetary policy controls the growing inflation rates and ensures price stability of goods and services. Growing inflation in the country leads to increases in the prices of the goods and services and if effective measures are not taken to control it, then ultimately the value of money declines. Due to the decline in the value of money, the purchasing power of the individuals might get affected.
- Generating Employment: If the RBI monetary policy is good or there is an announcement of the interest rate reduction, then it can benefit a lot of people and industries. Due to the decrease in interest rates, it becomes quite an easier task for the industries to secure loans at the lower rates for the expansion purpose. This will eventually lead to creating better employment opportunities.
- Developing Banking Sector: It is known to everyone that a large percentage of the banks in India are governed by the RBI. The main objective of the RBI monetary policy is to smoothen the banking facilities in the country and provide final assistance to the people.
- Controlling Exports and Imports: The monetary policy of the RBI is to control the exports and imports. In simple terms, it means maintaining a balance between the exports and imports so that the flow of the currency in the country does not get affected.
What are the Key Rates RBI Employs While Preparing Monetary Policy?
- Repo Rate: It is basically the rate at which the RBI lends money to the banks for a short period of time. If the repo rate is increased by the RBI, then it becomes expensive for the back to borrow money from the Central Bank of India.
- Reverse Repo Rate: It is exactly the opposite of the repo rate. Here the RBI borrows funds from the banks for the short period of time. By lending money to the RBI, the banks earn interest on their funds.
- Cash Reserve Ratio (CRR): It is the number of funds the banks must have in the form of cash or deposits with the RBI. It basically means that the banks cannot use these funds for carrying out any kind of commercial activity. If there is an increase in the CRR by the RBI during the preparation of the monetary policy, then the banks will be required to deposit the higher amount with the RBI.
- Statutory Liquidity Ratio (SLR): It is essentially the minimum percentage of the deposits that the banks must maintain in the form of the cash, gold, government securities with the RBI. The banks are required to submit the SLR report to the RBI every alternate Friday. If the banks are not able to maintain the minimum SLR, then they have to pay a certain penalty amount.
So, with the RBI monetary policy meet around the corner, you must ensure that you understand the basic terms or objectives of the policy to ensure how it may impact your normal life and economy of the country.