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RBI Monetary Policy Update


On expected lines, the Reserve Bank of India (RBI) left the repo rate unchanged at 6.5% for the third time in a row amid concerns over rise in inflation.


GS III: Indian Economy

Dimensions of the Article:

  1. Recent Monetary Policy and RBI Decisions
  2. Instruments of Monetary Policy
  3. About Monetary Policy Committee (MPC)

Recent Monetary Policy and RBI Decisions:

Policy Repo Rate and CRR:

  • The Monetary Policy Committee (MPC) maintained the policy repo rate at 6.5%.
  • The Cash Reserve Ratio (CRR) remained unchanged at 4.5%.

Incremental Cash Reserve Ratio (I-CRR):

  • RBI directed banks to maintain an I-CRR of 10% to manage excess liquidity.
  • This move aims to withdraw surplus liquidity from the banking system, amounting to over Rs 1 lakh crore.

Inflation and Monetary Stance:

  • RBI continues with its “withdrawal of accommodation” stance, indicating a cautious approach until inflation risks subside.

Conversational Payments on UPI:

  • RBI proposed the introduction of “conversational payments” on UPI.
  • Users can interact with an AI-powered system to initiate and complete transactions.
  • The feature will initially support conversations in Hindi and English.

Offline Transactions with NFC:

  • RBI plans to enable offline transactions using Near Field Communication (NFC) technology.
  • This innovation will facilitate payments in scenarios with weak connectivity.

Increased Transaction Limit for Small Value Payments:

  • Per transaction limit raised to Rs 500 from Rs 200 for small value digital payments in offline mode.
  • Applicable to National Common Mobility Card and UPI Lite.

Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.

  • 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 at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
  • Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
  • 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 at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
  • Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
  • 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 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 is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (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 a bank is required to 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.

About Monetary Policy Committee (MPC)

  • The Monetary Policy Committee (MPC) is the body of the RBI, headed by the Governor, responsible for taking the important monetary policy decisions about setting the repo rate.
  • Repo rate is ‘the policy instrument’ in monetary policy that helps to realize the set inflation target by the RBI (at present 4%).
Membership of the MPC
  • The Monetary Policy Committee (MPC) is formed under the RBI with six members.
  • Three of the members are from the RBI while the other three members are appointed by the government.
  • Members from the RBI are the Governor who is the chairman of the MPC, a Deputy Governor and one officer of the RBI.
  • The government members are appointed by the Centre on the recommendations of a search-cum-selection committee which is to be headed by the Cabinet Secretary.
Objectives of the MPC

Monetary Policy was implemented with an initiative to provide reasonable price stability, high employment, and a faster economic growth rate.

The major four objectives of the Monetary Policy are mentioned below:

  • To stabilize the business cycle.
  • To provide reasonable price stability.
  • To provide faster economic growth.
  • Exchange Rate Stability.

-Source: Indian Express

June 2024