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RBI Monetary Policy Highlights

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October 01, 2022

Why in news?

The Monetary Policy Committee has decided to hike the repo rate by another 50 basis points to 5.9% from a rate of 4.4% earlier this May.

What is monetary policy?

  • Monetary policy is a plan under which the central bank takes necessary measures to ensure the economic growth and stability of the country.
  • These measures help the RBI to influence the demand and supply of money to stabilise inflation for the time being.
  • Tools of Monetary Policy- RBI uses several economic tools to control the economic activities, like
    • Changes in repo rates
    • Cash Reserve Ratio (CRR)
    • Statutory Liquidity Ratio (SLR)
    • Engaging in open market operations of selling or buying government securities
  • Types of monetary policy
    • Contractionary policy- It increases interest rates and limits the money supply to slow growth and decrease inflation.
    • Expansionary policy- It happens during times of slowdown or a recession
    • It lowers the interest rates, where saving becomes less attractive and consumer spending and borrowing increase.

What are the goals of the monetary policy?

  • Inflation- Contractionary monetary policy is used to target a high level of inflation and reduce money circulating in the economy.
  • Unemployment- Higher money supply and attractive interest rates stimulate business activities and expands the job market.
  • Exchange Rates- With an increase in the money supply, the domestic currency becomes cheaper than its foreign exchange.

What are the key highlights of RBI Monetary Policy?

  • Status of Indian economy- The world is in midst of third major shock arising from aggressive rate hikes in advanced economies apart from the Covid impact and the Ukraine war.
  • Repo rate- RBI hikes benchmark lending rate by 50 basis points to 5.90%.
  • Others- Accordingly, the standing deposit facility (SDF) now stands at 5.65% and marginal standing facility (MSF) and bank rate at 6.15%.
  • Nature of policy- RBI to remain focused on withdrawal of accommodative monetary policy.
  • Inflation- Inflation expected to remain elevated at around 6% in second half of FY23.
  • Inflation projection for FY23 retained at 6.7% for FY23.
  • Currency- The rupee orderly depreciated by 7.4% against US dollar this year.
  • Forex Reserve- Forex Reserve now stands at 537.5 billion dollars.
  • Debt- External debt to GDP is lowest amongst growing economies.
  • Economic growth- RBI cuts its economic growth projection for FY23 to 7% from earlier estimate of 7.2%.
  • India’s import growth is decelerating compared to export growth.

What can be inferred from the report?

  • Rate hike- The move to hike the repo rate is justified under the extremely stressed global and domestic circumstances.
  • The unpredictable rupee was certainly an important factor.
  • Decline in forex reserves- 67% of the decline in the foreign exchange reserves since April was due to valuation changes arising from strengthening US dollar and higher American bond yields.
  • Growth forecast- Aggressive tightening of monetary policies globally has led to the cut in growth forecast to 7%.
  • Economic activity- The Indian economy continues to be resilient and the economic activity in India remains stable.
  • Strengthening the banking sector- The RBI has taken a few regulatory and developmental measures that will strengthen the balance sheets of the banking sector.
  • Similar to the NBFCs, banks will now be subjected to a strong way of “expected loss based approach” for their loan loss provisioning.
  • Securitization of stressed assets- The RBI is considering the introduction of a framework for the securitisation of stressed assets similar to that of standard assets.
  • This will widen the investor base for direct purchases of stressed loans from banks and could lead to better price discovery for banks.

 

References

  1. https://www.ndtv.com/business/rbi-monetary-policy-live-updates-rbi-certain-to-raise-rates-today-3390575
  2. https://www.moneycontrol.com/news/opinion/rbi-presents-an-optimal-monetary-policy-9257201.html
  3. https://www.indiainfoline.com/article/news-top-story/key-highlights-of-the-rbi-monetary-policy-122093000403_1.html
  4. https://www.investopedia.com/terms/m/monetarypolicy.asp#:~:text=Monetary%20policy%20is%20a%20set%20of%20actions%20to%20control%20a,as%20either%20expansionary%20or%20contractionary.

 

Quick facts

  • Repo rate- Repo rate is the interest charged by the RBI when commercial banks borrow from them by selling their securities to the central bank.
  • Reverse repo rate- It is a rate at which RBI borrows money from the commercial banks of the country.
  • Inflation- Inflation is the economic situation when prices are rising over time and money loses value.
  • Currency depreciation- Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies.
  • Cash Reserve Ratio- It is a percentage of the banks' deposits maintained in cash form with the RBI.
  • Statutory Liquidity Ratio- It is an obligatory reserve of commercial banks' net demand and time liabilities, maintained as approved securities by the commercial banks themselves.
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