RBI Monetary Policy

Key-terms in the monetary policy review

Repo rate

• Repo rate is an interest rate at which the RBI provides liquidity under the liquidity adjustment facility (LAF) to banks against the collateral of government and other approved securities.
• Currently, the repo rate is at 6.50 percent.

Standing Deposit Facility (SDF) Rate

• SDF rate is a rate at which the RBI accepts uncollateralised deposits, on an overnight basis, from banks.
• The SDF is also a financial stability tool in addition to its role in liquidity management. The SDF rate is placed at 25 basis points below the policy repo rate.
• Currently, SDF rate is at 6.25 percent.

Marginal Standing Facility (MSF) Rate

• The penal rate at which banks can borrow, on an overnight basis, from the central bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2 per cent).
• MSF rate currently stands at 6.75 percent.

Fine Tuning Operations

• The main liquidity operation is supported by fine-tuning operations, overnight and/or longer tenor, to tide over any unanticipated liquidity changes during the reserve maintenance period.
• In addition, the RBI conducts, if needed, longer-term variable rate repo/reverse repo auctions of more than 14 days.

Monetary policy stance

There are various stances:

• Accommodative Stance, which means the central bank is prepared to expand the money supply to boost economic growth.
• Neutral stance suggests that the central bank can either cut rate or increase rate. This stance is typically adopted when the policy priority is equal on both inflation and growth.
• Hawkish stance indicates that the central bank’s top priority is to keep the inflation low. During such a phase, the central bank is willing to hike interest rates to curb money supply and thus reduce the demand.
• Calibrated tightening means during the current rate cycle, a cut in the repo rate is off the table.

CPI Inflation

• Consumer Price Index (CPI) based Inflation is a measure of changes in the price levels of goods and services purchased by households.

Fact Box: Monetary Policy

• Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act. 
• Monetary Policy Committee (MPC): The MPC’s primary responsibility is to set the repo rate, which serves as the key policy instrument for managing inflation.
• Composition: The committee comprises six members:
  • Three officials from the RBI: These internal members bring expertise in monetary matters.
  • Three external members: Nominated by the Indian government, these experts contribute diverse perspectives.
• Tools and instruments of monetary policy: cash reserve ratio, statutory liquidity ratio, bank rate, repo rate, reserve repo rate and open market operations.

UPSC PYQ

Q: With reference to the Indian economy, consider the following (UPSC 2015)

(1) Bank rate

(2) Open market operations

(3) Public debt

(4) Public revenue

Which of the above is/are component/ components of Monetary Policy?

(a) 1 only

(b) 2, 3 and 4

(c) 1 and 2

(d) 1, 3 and 4

Solution: (c)