MONEY MOVES : AN OVERVIEW OF THE RBI'S MONETARY POLICY STRATEGIES

 

Monetary policy in India is the process by which the RBI , the country's central bank, manages the supply of money and credit in order to achieve its economic goals. The primary objective of monetary policy in India is to maintain price stability, while keeping in mind the objective of growth. The RBI uses a variety of tools to achieve these goals , including adjusting interest rates , setting reserve requirements , and buying or selling government securities. The RBI also plays an important role in regulating the country's financial system including the banking sector.

The RBI has a monetary policy department that is responsible for formulating the monetary policy. The MPD monitors wide range of economic and financial data and uses it to advice the central bank on monetary policy  decisions . The MPD also communicates the central bank's monetary policy stance to the public through its bi-monthly monetary policy reports. The RBI has been using a flexible inflation targeting frame work  as the nominal anchor for monitory policy since 2016.

TOOLS

• Cash reserve ratio : The percentage of deposits that banks are required to hold as reserve with RBI .By changing the CRR the RBI, can increase or decrease the money available for lending , which affects the money supply in the economy.
• Statutory liquidity ratio : The percentage of deposits that banks are required to hold  in the form of liquid assets , such as cash or government securities. Like the CRR, changing the SLR can affect the money supply in the economy

• Repo Rate : The rate at which banks can borrow money from the RBI by pledging government securities as collateral. By raising  the repo rate, the RBI makes borrowing more expensive , which reduces the amount of credit available in the economy and can help to curb inflation.
• Reverse repo rate : The rate which banks deposit money with the RBI by pledging government securities collateral .
• Bank Rate: The rate at which RBI lend to commercial banks. Long term borrowing 
• Marginal standing facility rate : It is window for banks to borrow from the central bank in an emergency situation when inter bank liquidity dries up completely.

ISSUES

• Inflation targeting.
• Monetary transmission.
• Fiscal dominance.
• Shadow banking.
• Data availability .
• International spillovers.

WAY FORWARD

• Better coordination between monetary and fiscal policy.
• Improving the monetary transmission mechanism.
• Improving data quality availability.
• Regulating shadow banking.
• Coping with international spill overs.
• Transparency and communication.