RBI Revises Monetary Policy, Will India’s Economy Soar Soon?

Inflation is always and everywhere a monetary phenomenon.

– Milton Friedman

What is Monetary Policy?

The Monetary Policy is a policy which is formulated by the central bank i.e., Reserve Bank of India (RBI) which relates to the monetary matters. It involves measures taken to regulate the supply of money, availability, and cost of credit in the economy.

The policy also regulates the allocation of credit among users, as well as interest rates on borrowing and lending. The role of monetary policy in promoting economic growth in a developing country like India is also vital.

Monetary Policies Explained

Objectives of Monetary Policy:

  1. Economic growth
  2. Increase in employment
  3. Price stability and inflation control
  4. Exchange rate stability
  5. Balance of payments equilibrium
  6. Reducing income inequality

Monetary Policy Committee (MPC)

In India, the Monetary Policy Committee (MPC) is in charge of setting the benchmark interest rate. The Monetary Policy Committee meets at least four times a year (specifically, once per BIMONTHLY), and its decisions are published after each meeting.

The committee consists of six members: three Reserve Bank of India officials and three external members appointed by the Government of India. The Governor of Reserve Bank of India i.e., Shaktikanta Das is the chairperson ex-officio of the committee.

Revised Policies

The Monetary Policy Committee (MPC) met from April 5 to 7, 2021 on a virtual conference to discuss the policies for the FY 2021-22. It was constituted under section 45ZB of the Reserve Bank of India Act, 1934.

The MPC agreed at its meeting (April 7, 2021) on the basis of an evaluation of the current and changing macroeconomic situation.

Revised Monetary Policies

The various instruments of monetary policy include variations in bank rates, other interest rates, selective credit controls, supply of currency, variations in reserve requirements and open market operations.

Key Indicators
IndicatorCurrent rate
CRR3.50%
SLR18.00%
Repo rate4.00%
Reverse repo rate3.35%
Marginal Standing facility rate4.25%
Bank Rate4.25%
src- https://www.rbi.org.in/home.aspx
  • RBI maintained status quo fifth time in a row on policy rate; kept repo unchanged at 4%. Repo Rate is 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).
  • Consequently, reverse repo rate remained unchanged at 3.35% under LAF. Reverse Repo Rate is 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.
  • The Bank rate and Marginal Standing Facility (MSF) is maintained at 4.25%. It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. Section 49 of the Reserve Bank of India Act, 1934, governs the publication of the Bank Rate. This rate is linked to the MSF rate, so it adjusts automatically when the MSF rate changes, as well as when the policy repo rate changes.
  • Cash Reverse Ratio (CRR) was increased from 3% to 3.50%. It is the average daily balance that a bank is required to maintain with the Reserve Bank as a share of such percentage of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
  • RBI said that the rates have remained unchanged because of the rise in the cases of COVID-19 and the arrival of second wave as it has created uncertainty over the economic growth recovery.
  • The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) also said that they will maintain an ‘accommodative stance’ as long as necessary to mitigate the impact of the COVID-19 pandemic. When a central bank takes an accommodative stance, it lowers interest rates to inject liquidity into the financial system when it is required. If the stance is changed to ‘neutral,’ the RBI will adjust rates in either direction to keep the money supply in check.
  • Speaking about the economic growth for the financial year 2021-22 (FY22), the MPC kept the GDP estimate for FY22 unchanged at 10.5 per cent. The first quarter (Q1FY22) GDP growth outlook is estimated at 26.2 per cent, 8.3 per cent in the second quarter (Q2FY22), 5.4 per cent in the third quarter (Q3FY22) and 6.2 per cent in the fourth quarter (Q4FY22).
COVID Induced GDP Growth
  • Though the IMF estimated the GDP to be 12.5%, RBI said it to be 10.5%, which is 2% less. This is the first time, such a gap is seen, it is because of the uncertainty and steady surge in COVID-19 cases.
  • In terms of inflation, the MPC revised consumer price index (CPI) inflation to 5% in the fourth quarter of fiscal year 2020-21 (Q4FY21) and forecasted CPI inflation of 5.2 percent in the first half (Q1 and Q2) of FY22, 4.4 percent in the third quarter, and 5.1 percent in the fourth quarter. RBI will maintain retail inflation at 4 per cent with a margin of 2 per cent on either side for another five-year period ending March 2026. This will be within the tolerance band.

Conclusion

The use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply, and credit availability in order to achieve the ultimate goal of economic policy is referred to as monetary policy.

RBI Monetary Policies

It is nonetheless vital in such an environment to maintain in an accommodative stance to support, nurture and consolidate the recovery. A great measure has taken as lowering the rate would amount to deflation and increasing rate at this point of time, would question the government. It is necessary to sustain growth on a durable basis, while ensuring that inflation remains within the target going forward. Hence, the RBI should take all steps, as needed, to ensure orderly conditions in the financial markets and to preserve financial stability.

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Bhakti Khara
I'm an undergraduate law student who aspires to be the best in my profession. As the daughter of Gujarati businessman, the world of numbers and finance has always piqued my interest. Nonetheless, I learn by knowing, doing and I also learn from the challenges and unrehearsed tasks. As an upcoming corporate lawyer, I believe it would be my responsibility to make you aware about not only the legalities associated with finance but also provide you with a wealth of information about the world of finance, which will fascinate you, as it did me.
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