Mohammad Hanief
The monetary policy is a policy formulated by the central bank, i.e., RBI (Reserve Bank of India) and relates to the monetary matters of the country. The policy involves measures taken to regulate the supply of money, availability, and cost of credit in the economy.
The policy repo rate was predicted to remain at 6.5% by the street. The market anticipated the RBI would keep the policy repo rate at 6.5 percent. Experts claim that the lowering of retail inflation in April and the possibility for future decreases demonstrate the effectiveness of earlier policy rate moves.
The Reserve Bank of India’s (RBI) monetary policy committee (MPC) on June 8, 2023 has decided to keep the repo rate unchanged at 6.5%, For the fiscal 2023-24, the second bimonthly monetary policy meeting took place over a three-day period from June 6-8, 2023.
The central bank has kept stability as a priority, according to RBI Governor Shaktikanta Das and added that Fundamentals for the domestic economy are improving as there is still more work to be done in terms of normalising policy around the world.
The RBI’s Monetary Policy Committee (MPC) anticipates that growth will fluctuate throughout the year, with an expected surge to 8% in the first quarter before tapering off to 5.7% by the final quarter. These projections suggest a robust start to the fiscal year followed by a gradual slowdown.
The RBI governor says that the Indian economy and financial sector stand strong and resilient amidst unprecedented global headwinds as this optimism is reflected in the central bank’s decision to keep the repo rate unchanged at 6.5%, reinforcing the stability of the nation’s monetary policy.
The MPC is focusing its efforts on the withdrawal of accommodation of policy stance, indicating a possible tightening of monetary policy in response to inflation concerns. “Close and continued vigil on evolving inflation is absolutely necessary,” stated Governor Das, signalling the central bank’s commitment to maintaining price stability.
The RBI revised its retail inflation projection for FY’24 downwards to 5.1% from an earlier estimate of 5.2%. Despite this slight decrease, the Governor emphasized that headline inflation is above the RBI’s target of 4% and is expected to remain so for the rest of the year.
The RBI monetary policy also oversees distribution of credit among users as well as the borrowing and lending rates of interest. In a developing country like India, the monetary policy is significant in the promotion of economic growth. 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.
While the main objective of the monetary policy is economic growth as well as price and exchange rate stability, there are other aspects that it can help with as well. Since the monetary policy controls the rate of interest and inflation within the country, it can impact the savings and investment of the people. A higher rate of interest translates to a greater chance of investment and savings, thereby, maintaining a healthy cash flow within the economy.
By helping industries secure a loan at a reduced rate of interest, monetary policy helps export-oriented units to substitute imports and increase exports. This, in turn, helps improve the condition of the balance of payments.
The two main stages of a business cycle are boom and depression. The monetary policy is the greatest tool using which the boom and depression of business cycles can be controlled by managing the credit to control the supply of money. The inflation in the market can be controlled by reducing the supply of money. On the other hand, when the money supply increases, the demand in the economy will also witness a rise.
Since the monetary policy can control the demand in an economy, it can be used by monetary authorities to maintain a balance between demand and supply of goods and services. When credit is expanded and the rate of interest is reduced, it allows more people to secure loans for the purchase of goods and services. This leads to the rise in demand. On the other hand, when the authorities wish to reduce demand, they can reduce credit and raise the interest rates.
As the monetary policy can reduce the interest rate, small and medium enterprises (SMEs) can easily secure a loan for business expansion. This can lead to greater employment opportunities. The monetary policy allows concessional funding for the development of infrastructure within the country.
Under the monetary policy, additional funds are allocated at lower rates of interest for the development of the priority sectors such as small-scale industries, agriculture, underdeveloped sections of the society, etc.
The entire banking industry is managed by the Reserve Bank of India (RBI) with aims to make banking facilities available far and wide across the nation, it also instructs other banks using the monetary policy to establish rural branches wherever necessary for agricultural development. Additionally, the government has also set up regional rural banks and cooperative banks to help farmers receive the financial aid they require in no time.
The Flexible Inflation Targeting Framework (FITF) was introduced in India post the amendment of the Reserve Bank of India (RBI) Act, 1934 in 2016. In accordance with the RBI Act, the Government of India sets the inflation target every 5 years after consultation with the RBI. In this framework, there are chances of not achieving the inflation target fixed for a particular amount of time.
Banks are required to keep aside a set percentage of cash reserves or RBI approved assets. Reserve ratio is of two types: Cash Reserve Ratio (CRR) – Banks are required to set aside this portion in cash with the RBI. The bank can neither lend it to anyone nor can it earn any interest rate or profit on CRR. Statutory Liquidity Ratio (SLR) – Banks are required to set aside this portion in liquid assets such as gold or RBI approved securities such as government securities. Banks are allowed to earn interest on these securities, however it is very low.
In order to control money supply, the RBI buys and sells government securities in the open market. These operations conducted by the Central Bank in the open market are referred to as Open Market Operations. When the RBI sells government securities, the liquidity is sucked from the market, and the exact opposite happens when RBI buys securities. The latter is done to control inflation. The objective of OMOs are to keep a check on temporary liquidity mismatches in the market, owing to foreign capital flow.
The Reserve Bank of India has increased the repo rate by 25 basis points on 8 February 2023. The current repo rate is 6.50% while the reverse repo rate is 3.35%. The Bank Rate and the Marginal Standing Facility (MSF) rate has increased to 6.75%. The Standing Deposit Facility Rate is now 6.25%. This is the sixth hike in repo rate since May 2022 leading to a total increase of 250 basis points.
(The author is a columnist and
can be mailed at [email protected]).
