RBI Monetary Policy - Objectives and Instruments

RBI Monetary Policy Objectives
RBI Monetary Policy - Objectives & Instruments

RBI Monetary Policy - Objectives & Instruments

RBI Monetary Policy is an important topic for students who are involved in preparation of banking sector examination. We tried to put all contents on this topic inside this post based on the questions asked in previous year banking exams like IBPS, SBI PO, SBI Clerk etc.

Under this article we will cover the following :


1. What is Monetary Policy ?


Monetary Policy is the process of implementing the action plans by monetary authority of a country in order to maintain supply of money in the economy. 

In other words, Monetary policy consists of management of money supply in the economy by increasing or decreasing interest rates, aimed at achieving objectives such as controlling inflation, price stability, consumption, growth and liquidity.


2. Monetary Policy of India


In India, Reserve Bank of India is the central monetary authority and thus it hold the responsibility of conducting monetary policy. The amended RBI Act, 1934 explicitly provides the legislative mandate to the Reserve Bank to operate the monetary policy framework of the country.

Section 45ZB of the amended RBI Act, 1934 also provides for an empowered six-member monetary policy committee ( MPC ) to be constituted by the Central Government by notification in the Official Gazette.


3. MPC or Monetary Policy Committee of India


The central government constituted the monetary policy committee on September 2016. The first meeting of the MPC was held on 3rd and 4th October 2016.

The MPC determines the policy interest rate required to achieve the inflation target. The Reserve Bank’s Monetary Policy Department ( MPD ) assists the Monetary Policy Committee in formulating the monetary policy.

Governor of Reserve Bank of India is the head of monetary policy committee.


4. Objectives of Monetary Policy


Some of the Monetary Policy objectives as stated by Reserve Bank of India are as follows :

A. Price Stability : It is the primary objective of monetary policy as stated by RBI. Price stability is an important precondition for business certainty and the sustainable growth of an economy. Thus, RBI uses various instruments of monetary policy which we have listed later in this post to maintain price stability in India.

B. Inflation : Monetary Policy is used to target inflation level in an economy. The low inflation level is good for an economy whereas in case of high inflation level in an economy, the tools of monetary policy are used to maintain its level.

C. Currency Exchange Rates : Using fiscal policy governing fiscal authority in India, RBI can regulate the exchange rates between domestic and foreign currencies.

D. Unemployment : Monetary policy also aims to reduce unemployment in an economy.


5. Instruments of Monetary Policy


There are many direct and indirect instruments used by reserve bank of India in order to maintain and implement monetary policy in the country. 

Here we are posting some important Monetary Policy instrument used by RBI :

A. Repo Rate : Repo Rate stands for Repurchasing Option Rate. Repo Rate is the rate at which RBI lend funds to commercial banks against government collateral or other securities under the liquidity adjustment facility ( LAF ). 

B. Reverse Repo Rate : Reverse Repo Rate is the rate at which RBI borrow money from commercial banks under the liquidity adjustment facility ( LAF ).

C. LAF : LAF stands for liquidity adjustment facility. It involves overnight as well as term repo auctions.

D. MSF : MSF stands for marginal standing facility. Under MSF, scheduled commercial banks can borrow additional amount of overnight money from RBI by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. 

E. Bank Rate : Bank Rate is also known as discount rate. It is the rate at which RBI buy re-discount bills of exchange or other securities from commercial banks. 

F. CRR Rate : CRR Rate stands for Cash Reserve Ratio Rate. CRR Rate is an amount of share or fund that a bank has to keep everyday with the central bank of the nation i.e. RBI ( Reserve Bank of India ) in form of Cash. CRR calculation is based on NDTL ( Net Demand and Time Liability ).

G. SLR Rate : SLR Rate stands for Statutory Liquidity Ratio. SLR Rate is an amount of share or fund that a bank has to keep with itself invested in safe or liquid assets such as gold, government securities or cash. SLR calculation is also based on NDTL ( Net Demand and Time Liability ).

H. OMO : OMO stands for open market operations. Open Market Operations refer to buying and selling of government securities by RBI in order to maintain money flow in the economy.


6. Important Points to remember about RBI Monetary Policy


A. RBI monetary policy refers to the policy framed by Reserve Bank of India in order to maintain stable money supply in the economy.

B. The primary objective of monetary policy as stated by RBI is price stability in India.

C. Monetary Policy Committee of India determines the policy interest rate required to achieve the inflation target.

D. There are various direct and indirect instruments of monetary policy used by RBI in order to maintain stability in the economy.

E. CRR Rate is also referred as Reserve Requirement Rate in some countries. [ Asked in SBI PO - 2011 ]

F. Bank Rate is aligned to MSF Rate thus changes automatically when MSF Rate changes.


7. Current Monetary Policy Rates as in June 2019


a. Current Repo Rate : 5.75 %

b. Current Reverse Repo Rate : 5.50 %

c. Current MSF Rate : 6.00 %

d. Current Bank Rate : 6.00 %

e. Current CRR Rate : 4 %

f. Current SLR Rate : 19 %


8. Previous year Question and Answers based on Monetary Policy


Q 1. What is current Repo Rate defined by RBI ?
A. 3 %
B. 4 %
C. 5.25 %
D. 5.75 %


Q 2. CRR is calculated based on NDTL. What does ' T ' incicates in NDTL ?
A. Tax
B. Time
C. Term
D. None of These


Q 3. What is the Reverse Repo Rate at present in India ?
A. 4.25 %
B. 5 %
C. 5.25 %
D. 5.50 %


Q 4. The rate at which RBI borrows money from bank is called as ______.
A. Repo Rate
B. Cash Reserve Ratio Rate
C. Reverse Repo Rate
D. Bank Rate


Q 5. Who is head of MPC related to Banking of Financial term ?
A. Governor of RBI
B. Deputy- Governor of RBI
C. Union Finance Minister
D. Revenue Secretary

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